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The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia I
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Printed in January 2015
The Cambodia Investment Climate Assessment 2014 is a product of staff of the World Bank and the
Asian Development Bank. The findings, interpretation and conclusions expressed herein do not necessarily
refl ect the views of the Board of Executive Directors of the World Bank, the donors or the governments they
represent.
The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors,
denominations, and other information shown on any map in this work do not imply any judgment on the part
of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such
boundaries.
Cover photographs are Copyright World Bank.
CAMBODIA
The Investment Climate Assessment, 2014
Creating Opportunities for Firms in Cambodia
Table of Contents
Abbreviations.....................................................................................................................................................8
Acknowledgement ............................................................................................................................................9
Executive Summary........................................................................................................................................10
Chapter 1: Critical Constraints......................................................................................................................16
1.1 Introduction......................................................................................................................................................................................16
1.2 Key Constraints on Cambodia’s business environment.................................................................................................18
1.2.1 Electricity...........................................................................................................................................................................23
1.2.2 Corruption..........................................................................................................................................................................26
1.2.3 Taxes and regulations...................................................................................................................................................31
1.2.4 Labor................................................................................................................................................................................... 39
1.2.5 Finance............................................................................................................................................................................... 43
1.2.6 Trade and logistics..........................................................................................................................................................47
Chapter 2: Coping with a Demanding Investment Climate I- The Rise of SEZs..................................... 54
2.1 Introduction..................................................................................................................................................................................... 54
2.2 SEZs in Cambodia........................................................................................................................................................................ 55
2.3 Firm characteristics: inside versus outside the SEZs.....................................................................................................57
2.4 SEZs and the investment climate........................................................................................................................................ 58
2.5 Productivity performance of firms in SEZs....................................................................................................................... 60
2.6 SEZ firms and local economy linkages and spillovers...................................................................................................62
2.7 Spillover potential of SEZ-based firms.................................................................................................................................62
2.8 Evidence of input-output linkages......................................................................................................................................... 65
2.8.1 Labor market spillovers...............................................................................................................................................67
2.8.2 Labor skills....................................................................................................................................................................... 70
2.8.3 Electricity...........................................................................................................................................................................71
2.8.4 Corruption..........................................................................................................................................................................72
2.8.5 Customs and trade regulations................................................................................................................................72
2.9 Conclusions.....................................................................................................................................................................................73
2.10 Recommendations.....................................................................................................................................................................74
Chapter 3: Coping with a Demanding Investment Climate II- The Informal Sector...............................75
3.1 Introduction......................................................................................................................................................................................75
3.2 Informality among Cambodian enterprises........................................................................................................................77.
3.2.1 Which firms have an incentive to register?...........................................................................................................78
3.2.2 Which firms decide to stay informal?.................................................................................................................... 80
3.3 The link between informality and export status..............................................................................................................82
3.4 Costs and benefits of informality in Cambodia................................................................................................................ 84
3.4.1 Constraints perceived by formal vs. informal firms........................................................................................ 84
3.4.2 When do firms decide to become formal?........................................................................................................... 86
3.5 Contribution of the informal sector to the economy in Cambodia........................................................................... 88
3.5.1 Employment, capital, investment and value added in the informal sector............................................ 88
3.5.2 Informal firms’ sales and tax payments............................................................................................................... 90
3.5.3 Wages and training in the informal sector............................................................................................................91
3.6 Informal economy and macroeconomic efficiency........................................................................................................ 93
3.6.1: First policy option: create incentives to formalize the informal sector................................................... 94
3.6.2: Second policy option: enforce regulations to force informal firms to become formal......................97
3.6.3: Third policy option: support growth of informal firms................................................................................... 98
3.7: Conclusions.................................................................................................................................................................................... 99
3.8: Recommendations....................................................................................................................................................................100
References.................................................................................................................................................... 102
Annexes ........................................................................................................................................................ 105
Annex I: Profile of investment climate perceptions..................................................................................................105
Annex II: Investment climate and productivity............................................................................................................ 107
Annex III: Registered SEZs in Cambodia........................................................................................................................ 1 14
Annex IV: Background on survey sample.................................................................................................................................120
Annex V: Levels of Cambodian business formalization........................................................................................... 123
Annex VI: Multivariate regressions predicting whether a firm has a firm, tax, VAT or labor
registration................................................................................................................................................................................ 124
Annex VII: Reported major and severe constraints to business operation by registration
status (%)................................................................................................................................................................................... 126
Annex VIII: Cobb-Douglas production function estimates (dependent variable: log of value
added).......................................................................................................................................................................................... 127
List of Figures, Boxes, and Tables
List of Figures
Figure 1.1: Major or severe constraints faced by all firms (registered and unregistered) in Cambodia,
2012...............................................................................................................................................................................11
Figure 1.2: Electricity, corruption and anti-competitive practices are most often ranked as the top
constraint by registered firms.............................................................................................................................19
Figure 1.3: Electricity is the top constraint, but there is no consensus on other constraints......................... 20
Figure 1.4:
C orruption remains problematic despite improvements in Cambodia’s level of
development...............................................................................................................................................................22
Figure 1.5: Electricity concerns of businesses in Cambodia are high compared to region...............................23
Figure 1.6: Cambodia has the highest rate of electric power transmission and distribution losses as a
percentage of output..............................................................................................................................................24
Figure 1.7: Cambodia’s rate of electric power transmission and distribution losses is rising..........................24
Figure 1.8: Firms in the tourism and manufacturing sectors have the most generators..................................25
Figure 1.9: Agro-processers and non-garment manufacturers get most electricity from generators.......25
Figure 1.10: Cambodia has the lowest rating for transparency, accountability and corruption (2012).........26
Figure 1.11: Cambodia still leads region in share of firms that see corruption as the main problem.............27
Figure 1.12: Cambodian firms expect to make informal payments to get things done........................................27
Figure 1.13: The cost of securing a government contract often includes bribes....................................................28
Figure 1.14: Most firms expect to make gifts or informal payments to officials….................................................28
Figure 1.15: but the overall cost of informal payments is low........................................................................................29
Figure 1.16: Vulnerability of small firms varies across..................................................................................................... 30
Figure 1.17: Most registered firms give gifts or informal payments to officials..................................................... 30
Figure 1.18: Most unregistered firms give gifts or informal payments to officials.................................................31
Figure 1.19: Tax in Cambodia is lower than comparators.................................................................................................32
Figure 1.20: but many managers say tax is a major constraint......................................................................................32
Figure 1.21: Small firms in non-garment industries report making most informal payments to tax
authorities.................................................................................................................................................................. 33
Figure 1.22: More firms consider taxes the main constraint.......................................................................................... 34
Figure 1.23: Fewer firms regard licensing and permits as a major constraint........................................................ 34
Figure 1.24: The number of days needed for administrative requirements has risen........................................... 35
Figure 1.25: Informal fees cost 14-28% of each license and permit............................................................................. 36
Figure 1.26: Large firms require most licenses and permits........................................................................................... 36
Figure 1.27: Senior managers of large non-garment firms spend the most time dealing with regulatory
requirements..............................................................................................................................................................37
Figure 1.28: Confidence in the judicial enforcement of contracts is low................................................................... 38
Figure 1.29: Many Cambodian firms rate lack of skills and training as a major constraint................................ 39
Figure 1.30: Lack of skills and training is increasing in all sectors............................................................................... 39
Figure 1.31: Cambodia’s overall productivity has improved, but manufacturing productivity lags................ 40
Figure 1.32: Domestic firms are suffering more from the lack of skills and training….........................................41
Figure 1.33: while exporters are suffering more than non-exporters from the lack of skills and training............. 41
Figure 1.34:
Manufacturing positively influences the skill constraint, new technology reduces its
importance..................................................................................................................................................................42
Figure 1.35: Cambodia does comparatively well in access to finance........................................................................ 43
Figure 1.36: Only a few Cambodian firms use banking services................................................................................... 44
Figure 1.37: Small firms have most credit with financial institutions......................................................................... 44
Figure 1.38: All major sectors have more credit than before......................................................................................... 45
Figure 1.39: Twice as many registered firms have loans as informal ones.............................................................. 46
Figure 1.40: Bank loan applications are overwhelmingly accepted............................................................................. 46
Figure 1.41: Most firms do not need loans..............................................................................................................................47
Figure 1.42: Fewer Cambodian firms now perceive Customs regulations as a major constraint.....................47
Figure 1.43: Non-garment exporters have the greatest concerns about Customs constraints...................... 48
Figure 1.44: Firms need more information about trade regulations............................................................................ 49
Figure 1.45: Cambodia’s border export costs are high...................................................................................................... 50
Figure 1.46: and so are its import costs.................................................................................................................................. 50
Figure 1.47: Costs are rising, time taken is falling...............................................................................................................51
Figure 1.48: Improvements in Cambodia’s LPI score is helping it move to full participation in the AEC
2015...............................................................................................................................................................................51
Figure 1.49: Cambodia’s LPI shows remarkable improvements from reforms.......................................................52
Figure 1.50: Cambodia has the highest share of firms making informal payments or gift-giving to get
import licenses..........................................................................................................................................................52
Figure 2.1: Percentage of firms ranking constraint as their top 3 obstacles......................................................... 60
Figure 2.2: International technology licensing and quality certification........................................................63
Figure 2.3: Innovation and R&D..................................................................................................................................64
Figure 2.4: Input linkages – percentage of material inputs purchased from domestic sources......65,66
Figure 2.5: Output linkages – % of outputs sold domestically..........................................................................66
Figure 2.6: Average monthly wage (US$) of an unskilled production worker.............................................. 67
Figure 2.7: Skills and training......................................................................................................................................68
Figure 2.8: Composition of firms’ workforce.......................................................................................................... 71
Figure 2.9: Time (days) to clear goods through customs................................................................................... 73
Figure 3.1: Percent of firm registration at MoC, by number of employees.................................................. 78
Figure 3.2: Frequency of registration by type and firm size..............................................................................79
Figure 3.3: Sector and location by firm registration............................................................................................80
Figure 3.4: Age of firm, export status and ownership by firm registration .................................................. 81
Figure 3.5: Number of exporters and per-capita GDP, 2009.............................................................................82
Figure 3.6: Distribution of export value across firms, 2009..............................................................................83
Figure 3.7: Export size, concentration and survival rate, 2009........................................................................84
Figure 3.8: Repor ted major and severe constraints- different responses between informal and
formal firms................................................................................................................................................85
Figure 3.9: Firm has line of credit or bank loan, by formal status.............................................................................. 86
Figure 3.10: Proportion of firms that remains unregistered by firm age and period of start-up.......................87
Figure 3.11: Mean and median change in log employment 2008-12, by registration status..............................87
Figure 3.12: Contribution by firms without firm registration by firm size................................................................. 90
Figure 3.13: Average monthly wage without and with benefits by firm registration ............................................92
Figure 3.14: Firm has formal training program.................................................................................................................... 93
Figure 3.15: Labor productivity and capital intensity by formal status...................................................................... 94
Figure 3.16: Mean, median and dispersal of marginal revenue products of capital and labor, by formal
status........................................................................................................................................................................... 95
Figure 3.17: Log scale of marginal revenue product capital: formal vs. informal.................................................. 96
Figure 3.18: Aggregate gain in productivity by degree of formalization of informal sector............................... 96
Figure 3.19: Aggregate gain in productivity by degree of liquidation of informal sector..................................... 98
Figure 3.20: Aggregate gain in productivity by increase in capital of informal sector.......................................... 99
List of Boxes
Box 1.1: Links between the ICA 2014 and Cambodia’s Industrial Development Policy 2014-2024.........15
Box 2.1: SEZs and diversification in light manufacturing......................................................................................... 56
Box 2.2: Do SEZs Make a Difference? Perceptions of Investment at the Local Level.................................. 69
List of Tables
Table 1.1: The importance of the investment climate for productivity.................................................................. 53
Table 2.1: Key differences between SEZ and non-SEZ firms..................................................................................... 58
Table 2.2: Percentage of firms ranking constraint as “major” or “very severe”.................................................. 58
Table 2.3: Performance comparison: SEZ and non-SEZ firms....................................................................................61
Table 2.4: Percentage of firms that rate the business environment in the SEZ as better than the
business environment in the country overall............................................................................................... 69
Table 2.5: Indicators of electricity infrastructure quality and price..........................................................................72
Table 3.1: Contribution of informal sector (share).......................................................................................................... 89
Table 3.2: Share of sales reported for tax purposes by typical firm in same area of activity by formal
status and firm size................................................................................................................................................ 90
List of Annex Tables
Table 1.1: Respondents’ evaluation to general constraints to operation (% of firms evaluating constraint
as ‘major’ or ‘very severe’).................................................................................................................................105
Table 2.1: Productivity and the investment climate, pooled regressions (2007 and 2012).........................109
Table 2.2: Random effect estimates of impact of investment climate variables on productivity............. 111
Table 2.3: The importance of the investment climate for productivity................................................................ 113
Table 3.1: List of registered Special Economic Zones in Cambodia....................................................................... 114
Table 4.1: Original sample for Cambodia’s Enterprise Survey (2012)...................................................................120
Table 4.2: Cambodia’s Enterprise Survey – Restricted Sample (number of firms).......................................... 121
Table 4.3: Restricted Sample – Breakdown by Sectors (%firms)............................................................................ 122
Abbreviations
ASEAN Association of South East Asian Nations
AEC ASEAN Economic Community
CO Certificate of Origin
EBA Everything-But-Arms Initiative
FDI Foreign direct investment
GDP Gross Domestic Product
ICA Investment Climate Assessment
IDP Cambodia’s Industrial Development Policy, 2014-2024
LPI Logistics Performance Index
MEF Ministry of Economy and Finance
MOC Ministry of Commerce
NSW National Single Window
NTM Non-Tariff Measure
RGC Royal Government of Cambodia
SEZ Special Economic Zone
SME Small- and medium-size enterprise
TFP Total Factor Productivity
The Investment Climate Climate Assessment 2014
8 Creating Oppor tunity for Firms in Cambodia
Acknowledgements
The report was prepared by a World Bank team led by Julian Latimer Clarke (Senior Economist), with
assistance from Professor Remco Oostendorp (Free University of Amsterdam), Tom Farole (Senior Econo-
mist), Vannara Sok (Operations Officer), Fabio Artuso (Senior Trade and Regional Integration Specialist), and
Montague Lord (Consultant). The paper identified issues that will be discussed in the forthcoming Cambodia
Economic Note, both in consultation with the Royal Government of Cambodia (RGC) and in the final draft
partnership strategy.
The paper benefited greatly from interactions with the Cambodia team, particularly Enrique Aldaz-Carroll
(Senior Country Economist), Mathew A. Verghis (Sector Manager) and Ulrich Zachau (Country Director, South
East Asia). The team gratefully acknowledges the administrative oversight and report production that was
led by Lyden Kong (Program Assistant) and the coordination of the launch event by Lyden Kong, and Saroeun
Bou (Communications Officer). Overall guidance was provided by Mona Haddad (Practice Manager, Trade and
Competitiveness), and Alassane Sow (Country Manager, Cambodia).
The report has greatly benefitted from interactions with various stakeholders in Cambodia. The active par-
ticipation in the process by HE Sok Chenda Sophea, Minister attached to the Prime Minister and Secretary
General of the Council for the Development of Cambodia (CDC), was particularly useful in polishing the final
draft. Representatives of the Supreme National Economic Council (SNEC), the Ministry of Commerce and the
Ministry of Economy and Finance (MEF) provided excellent feedback that helped shape the final document.
The team also thanks all of those who provided comments and feedback on earlier drafts of the study, includ-
ing the Senior Minister, the Minister of Commerce HE Sun Chanthol, the Secretary of State of the Ministry of
Economy and Finance HE Vongsey Vissoth, the Minister of Environment HE Say Sam Al, the Director General
of the General Department of Customs and Excise (GDCE) HE Dr. Kun Nhem, representatives of the Inter-
national Business Chamber (IBC), the EU Chamber of Commerce (EuroCham), and development partners
particularly the EU and JICA.
The findings and interpretations expressed here are those of the authors and do not necessarily reflect the
views of the World Bank Group, its Executive Directors, or the countries they represent.
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 9
Executive Summary
1. Over the past decade, Cambodia has more than halved its rate of poverty thanks to economic growth
averaging 8 percent per annum, strong export performance and positive changes to the investment
climate. Exports, dominated by garments, footwear and tourism, are projected to reach almost $8
billion in 2014. The garment industry has played an important role in reducing poverty by creating job
opportunities for more than 650,000 workers, mostly young women migrating to Phnom Penh from
the countryside. The tourism sector has also been a growth driver, attracting foreign direct investment
(FDI), contributing to the expansion of the construction sector, and establishing strong backward linkages
to poorer communities.
Cambodia is an attractive investment destination as it is strategically located at the center of
2.
ASEAN, creating significant opportunities for integration into regional and global value chains.
Cambodia is benefiting from sustained economic growth in the region, with increased opportunities
offered by ASEAN economic integration and preferential access to the EU market. Moreover, compared
to several regional peers, Cambodia enjoys an abundance of labor at relatively low salaries that has
contributed to high and sustained FDI, which at 8.8% of GDP is considerably higher than neighboring Lao
PDR, Thailand or Vietnam. The Cambodian economy is diversifying into new product areas and attracting
more sophisticated investors through linkages into regional value chains.
With a changing global environment, Cambodia is likely to face increasing challenges maintaining
3.
and expanding market access in a dynamic and highly competitive region. Because of the high
concentration of its export base, Cambodia remains vulnerable to external shocks, which could have
a pervasive impact on its economy. As an LDC, Cambodia benefits from enhanced market access to
some developed markets, notably the EU, which has been critical in the development of its export base,
but this window of opportunity for preferential access to developed markets is eroding as free-trade
agreements proliferate (negotiations between the EU and Vietnam are at an advanced stage, for example) and
Cambodia’s LDC status wanes.
4.
Cambodia’s comparative advantages are increasingly under pressure from regional peers such as
Myanmar and Vietnam, which present valid alternatives for investment in labor-intensive manufacturing.
Cambodia thus needs to increase further its competitiveness, by improving its connectivity to neighboring
countries through better logistics and trade facilitation, and by enhancing the policy space surrounding
trade and investment to attract and hold these new investors while building clusters around new
industries. By addressing the bottlenecks in the business environment, Cambodia can increase its trade
integration and move up the manufacturing value chain.
The Royal Government of Cambodia (RGC) recognizes the importance of enhancing the investment
5.
environment and has initiated a series of reforms. The new five-year Rectangular Strategy III
continues to prioritize improvements to the business environment that will help diversify and increase
value-added in production. Increased capacity within Government has led to a strengthened resolve to
The Investment Climate Climate Assessment 2014
10 Creating Oppor tunity for Firms in Cambodia
enhance market access for new investors and to create opportunities for Cambodian exporters. The RGC
reform program includes the streamlining and automation of government procedures, reforms to the
laws relevant to the investment climate, trade policy and the stronger enforcement of rule of law.
Progress has been greatest on trade facilitation, as reflected by the impressive improvement
6.
in Cambodia’s ranking on the World Bank’s Logistics Performance Index (LPI). Cambodia has
drastically improved its logistics performance, jumping 46 places in the LPI ranking to 83 in 2014 from
129 in 2010. Customs clearance times have fallen from 5.9 days in 2010 to only 1.4 days in 2014, while
the percentage of consignments selected for inspection has fallen from 29 percent in 2010 to only
17 percent in 2014.
Despite the government’s effort at introducing reforms to improve the investment climate, the
7.
business environment continues to hamper the competitiveness of firms in Cambodia. According
to the 2012 World Bank Enterprise Survey, the most severe constraints faced by firms include the cost of
electricity, corruption and anti-competitive practices, and transport and logistics (Figure 1.1). Moreover,
there are specific constraints that affect two important production clusters in the economy: firms in
Special Economic Zones (SEZs) and firms in the informal sector. The main constraints faced by firms in
SEZs include skills (number one), followed by corruption and electricity. The main constraints faced by
firms in the informal sector include transport, electricity, and telecommunications.
Figure 1.1: Major or severe constraints faced by all firms (registered and unregistered) in Cambodia, 2012
a "major" or "severe" constraint
Percent of ﬁrms saying issue is
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
.
on
s its ns der ns .... ion nd ce tes cy.. tion cing ices tion tion inty icity
a rti erm latio isor catio ict .. trat o La ﬁnan Ra Poli ca an ct ta up ta tr
e
l
gu nd p Regu nd d uni ont
l
i nis ss t t
x
o Ta ory Edu f ﬁn l pra spor orr ncer Elec
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rR ga e ta m /C m
ad Acc cces ula
& o
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a n
ic
U
bo sin Trad thef ecom em ax eg Skil om
La icen d e , e l st T A R C i n
o n
an rim T l Sy & e
Ec
L ic tiv
t o ms C eg
a
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s L o a
Cu Ec co M
ti-
An
Constraint
Source: World Bank Enterprise Survey, 2012.
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 11
Key constraints and priority measures to supporting producers and
investors
The relatively high cost of electricity hampers the performance of Cambodian firms. Electricity
8.
is seen as the main constraint on the business environment. Not only is electricity more expensive in
Cambodia than in almost every other country in the region, but the supply is intermittent. Manufactur-
ers are forced to rely on electrical generators for a substantial amount of their power needs. This prob-
lem is particularly acute in the border regions where the special economic zones (SEZs) are located.
The Government can contribute to enhanced competitiveness of firms and attract new investors by
decreasing electricity costs, which comprise a major component of firms’ overall operating costs. In the
medium term, the RGC could address the high cost of electricity with a comprehensive national plan
comprising the review of energy sources (including renewable energy) and identify specific regulations
that may be contributing to the high cost of energy. In the short term, priority should be given to improve
existing agreements with neighboring countries to ensure a steady and reliable provision of electricity
to the SEZs located near the border.
Corrupt and anti-competitive practices remain one of the main obstacles to doing business:
9.
while the amount of informal fees paid has declined as a proportion of overall sales, the incidence
of informal payments has risen. There are indications that for certain activities such as importing
goods, the number of firms paying gifts at the time of the survey had increased although the size of the
payment was lower as a proportion of overall sales than in previous ICA surveys. Furthermore, uncom-
petitive practices, which are closely related to informal payments, are perceived as a major impediment
to doing business in Cambodia. Corrupt and informal practices proliferate in opaque environments that
require face-to-face contact between investors and government officials.
10.
In the medium term, automation of key government processes could eliminate these practices by
removing any personal contact between parties and by creating a transparent online portal for informa-
tion about rules and processes required by firms. Automation has the added advantage of creating a
traceable record of transactions between the government and the private sector. In the short term, the
e-Commerce Law can be passed by the National Assembly so that firms can transact e-payments
for government services. At present, both the Ministry of Economy and Finance (MEF) and Ministry of
Commerce (MOC) are implementing automation in the areas of customs and border reform, new
company registration and Certificate of Origin (CO) that can serve as models for other ministries.
Moreover, completing the draft Competition Law and setting up an independent Competition Agency
would go a long way towards ensuring a level playing field for companies in a country where personal
connections are still considered important to business profitability.
Continued improvements in trade facilitation such as streamlining and automating export
11.
procedures and the implementation of a National Single Window (NSW) solution are needed
to reduce the cost of trading across borders. Despite huge progress in trade facilitation, Cambodia’s
performance still lags behind regional peers. Compliance with cumbersome and complex procedures is
proving to be a serious obstacle to export for small and particularly medium-sized firms. Firms in
Cambodia face export costs that are around 40% more than the regional average (Indonesia, Laos PDR,
Philippines, Vietnam). If Cambodia could enact measures that reduce its export cost to the regional
average, the total number of exporters would double, mainly due to the entry of middle-size firms
into export markets (Artuso and Reyes, 2014). The recent reforms made by Customs leave no room for
complacency as export procedures are still perceived to be cumbersome and time-consuming,
The Investment Climate Climate Assessment 2014
12 Creating Oppor tunity for Firms in Cambodia
characterized by manual processes and the involvement of several agencies in the issuance of import-
export permits and licenses. By streamlining and automating these procedures, in the framework of the
NSW, Cambodia can dramatically improve its trade performance by reducing the cost of doing business.
Special Economic Zones and the informal sector: specific attention to
specific needs
12. First, Special Economic Zones (SEZs) have a higher potential for innovation and technology
spillover, and can contribute to an expansion of Cambodia’s export base. Even if they are only
employing about 50,000 workers (the average number of employees per SEZ firm is 616), SEZs are
contributing significantly to a broader export base, assisting the establishment of foreign investors in
sectors that are completely new to the local economy, such as bikes, TV components, and toys. The
zones offer several benefits in terms of One Stop Shops and enhanced border clearance procedures.
They also provide better services than the rest of the country as measured by quantitative indicators
such as cost of electricity (15% cheaper), labor productivity (20% higher) and Customs and border
clearances (16% faster).
13. The SEZs do not yet meet the higher expectations of their investors. Firms based in the SEZs
typically have higher expectations for the investment climate, based on experiences in other countries
or on the promise of the SEZs. Similarly, the fact that some typical constraints (for example tax rates
and access to utilities) are not an issue for SEZ-based firms may lead to increased concerns over those
factors that do remain. Measures to continue to improve the business environment in SEZs include:
(i) streamlining the procedures in the one-stop-shops and introduce an automated risk management
system for cargo shipment inspections, particularly those related to Camcontrol, in order to reduce
delays; (ii) support SEZs’ efforts to improve low skill-level of workers through vocational training in
order to improve productivity; and (iii) Undertake a needs assessment of the current infrastructure
gaps, including in electricity, water supply and transport, and negotiate arrangements with the SEZ
operators to identify viable long-term solutions to the problems outlined by SEZ firms.
Second, firms in the informal sector account for a large proportion of production and employment,
14.
yet they are typically less productive than firms in the formal sector. SMEs are a major source of
employment (45% of total employment) and they represent a critical part of Cambodia’s production base
(99% of total firms). However, compared to countries at the same level of GDP, very few medium size
firms are actively exporting from Cambodia. The existence of a missing middle is likely to be associated
with a costly business environment that favors large businesses and encourages small firms to remain
small and informal so as to remain hidden from the regulatory environment.
The level of informality can be reduced by putting in place incentives for firms in the informal
15.
sector to move to the formal sector. Informal firms are perceived to have a price advantage over
formal firms and face less regulatory obstacles to doing business. This competitive edge appears to
prevent formal firms from operating on a level playing field. The persistence of these constraints over
several ICA surveys indicates that they are deeply embedded in the local business culture and are
therefore challenging for policy makers to address and alleviate. Rather than attempting to repress
informality, the Government may consider incentivizing firms in the informal sector to become formal,
thereby increasing fiscal revenues, providing higher wages for workers and ensuring better productivity.
In the short term, the RGC can design and implement a system of incentives for business registration
encouraging companies to become formal, thereby increasing fiscal revenues, providing higher wages
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 13
for workers and ensuring better productivity. In the short term, the RGC can design and
implement a system of incentives for business registration encouraging companies to
become formal.
Next Steps in reforming the investment environment
The increasing sophistication and diversity of Cambodia’s economy suggest a
16.
number of policy priorities that will require large investments as well as more
difficult regulatory changes. These include: (i) addressing the high cost of electricity; (ii)
automating Government processes; (iii) strengthening anticorruption measures; (iv)
improving trade facilitation; (v) completing the draft Investment, eCommerce and
Competition Laws; and (vi) designing and implementing a system of incentives for business
registration.
Cambodia’s continued success in improving the investment climate will rest on the
17.
Government’s efforts at implementation. Progress in the business environment can be
positively benchmarked against previous ICA surveys and in comparison to regional peers.
But Cambodia’s success depends on implementation. Cambodia’s regulatory environment
often follows international best practice and appears to comply with the RGC’s interna-
tional commitments and obligations. However, informal practices are still prevalent with
poor implementation often hindering the stated objectives of the regulations. The RGC
could design and implement a specific strategy aimed at creating incentives for officials to
implement duly the law.
A series of “smart” investment incentives may signal to investors the Government’s
18.
seriousness in attaining a robust investment climate. The revision of the current
Investment Law would lead to an enhanced regime of investment incentives and invest-
ment protection. A system of smart incentives and more effective investment protection
can pave the way to foreign investors opting to move into Cambodia, taking advantage of its
competitive labor cost and its favorable geographical location at the center of the ASEAN
Economic Community (AEC). A Zero-Corruption Strategy may be successful in curbing
corrupt practices within the SEZs. Enforcing such a strategy is feasible in the controlled
environment of an SEZ and may have strong resonance for Cambodia’s positive image as a
destination for foreign investment.
The current improvements in the investment climate and the RGC’s positive reform
19.
momentum present a unique opportunity for Cambodia to expand the economy and
increase social welfare. By seizing the opportunities offered by enhanced market access,
dynamic growth and its advantage in labor intensive manufacturing, Cambodia can use the
insights of the ICA report to ease the constraints on doing business, build investment and
foster diversification in order to create wealth and opportunities for the Cambodian people.
The Investment Climate Climate Assessment 2014
14 Creating Oppor tunity for Firms in Cambodia
Box 1.1: Links between the ICA 2014 and Cambodia’s Industrial Development Policy 2014-2024
The RGC’s Rectangular Strategy identifies the importance of automated trade and business
processes, and the need for regulatory reform. The RGC is currently developing its Industrial
Development Policy 2014-2024 that deals with many of the issues raised in this report. The RGC
will focus on broadening the manufacturing base, attracting new investment and creating growth
poles around the current manufacturing anchors. The IDP focuses on informality, which is dealt
with extensively in chapter 3 of this report and the so-called “missing middle” of non-exporting
SMEs, that is also discussed in chapter 3.
The recommendations in the ICA link to the IDP in the following ways:
Improved access to electricity is recognized as a key constraint in both the ICA and the IDP. The
1.
expansion of grid capacity and connectivity is advocated in both reports.
The issue of access to finance presents a puzzling picture because, while firms recognize that
2.
the cost of finance and the expense and difficulty of acquiring credit are major problems, very
few of those businesses say that they require additional finance. The IDP adopts a long-term
recommendation for enhanced credit intermediation through a strengthened regulatory
environment for financial services and by mobilizing capital through the securities market.
3. Diversifying the manufacturing base requires new investment and better integration into regional
value chains. This issue comes across clearly in the IDP 2014-2024 and is likewise recognized as
a key issue in the ICA 2014.
Increased connectivity, including trade facilitation and improvements to transport infrastructure
4.
are recognized in both reports as crucial to developing the business environment. Streamlining
export procedures and reducing obstacles to the development of new markets for Cambodia’s
merchandise trade feature as key recommendations in both reports.
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 15
01
CHAPTER
CRITICAL CONSTRAINTS
KEY MESSAGES
 T
he three major constraints to doing business are associated with electricity, corruption and
anti-competitive practices.
 E
lectricity is now the major concern of firms regardless of size and export orientation.
Not only is the price of electricity higher in Cambodia than almost anywhere in the region but
the service is patchy and inefficient.
 C
orruption still remains a major concern and is closely linked to prevalence of uncompetitive
practices. The proportion of firms paying informal fees has not diminished.
 A
nti-competitive or informal practices, cost of financing, and skills and education are rated
close to the top three constraints.
 C
ambodia remains an attractive country in which to source labor, due to (relatively) low
salaries, and its central location for manufacturers integrating into regional value chains.
 C
ustoms and trade regulations have dropped dramatically as a constraint since the first ICA
survey in 2003. This improvement is likely a reflection of the automation of Customs and
border processes, culminating in the roll-out of the ASYCUDA customs automation software
to major borders crossings and checkpoints.
 T
his survey examined firms in both the formal and informal sectors for the first time,
allowing comparisons between survey responses for the two groups.
1.1 Introduction
The Cambodia ICA 2014 provides an overview of the business environment across the country
20.
based on the large-scale Cambodia World Bank Enterprise Survey 2012. The data show that
Cambodia’s business and regulatory environment is reasonably competitive within the Association
of South East Asian Nations (ASEAN) region, with an upward bias seen in many of the key indicators.
Cambodia still remains an attractive place to source labor, due to the (relatively) low salaries expected
by workers, and a conveniently central location for manufacturers wishing to integrate into regional
value chains.
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16 Creating Oppor tunity for Firms in Cambodia
CRITICAL CONSTR AINTS
These competitive factors are still clouded by a host of regulatory, infrastructural and logistical
21.
issues that tend to act as constraints on FDI. The ICA report is designed to highlight these
vulnerabilities by taking stock of progress that has been achieved and focusing on the work that has
still to be done.
The three top constraints emerging from the survey are electricity, corruption and anti-
22.
competitive practices with concerns about corruption and, to a lesser extent, tax rates and
access to finance being higher for Cambodia than its low-income comparator countries.
Anti-competitive or informal practices, cost of financing, and skills and education are rated
near to the top three constraints. Customs and trade regulations have dropped dramatically as a
constraint since the first ICA survey in 2003, while access to electricity has worsened considerably
and ranks as the top constraint reported by most firms. Corruption remains one of the main concerns
as most firms are expected to make informal payments to public officials in order to get things
done. This motivates firms to remain small and informal. Even if these costs absorb only a
small proportion of business revenue, compared to regional peers, two-thirds of enterprises pay
informal fees worth over one-fifth of the official cost of their licenses and permits. Moreover, firms lack
competent workers, ranking skills as one of their main concerns.
Cambodia’s overall productivity has improved relative to the comparator countries, but that of
23.
the manufacturing sector has worsened. Efficiency gains, reflected in the overall improvement
in TFP, are associated with customs automation, better logistics infrastructure and reduced
labor conflicts, while access to finance is still cited as a major or severe problem to doing business.
The monetary and time-related costs of export registrations, together with the lack of adequate
information about trade-related regulations, contribute to Cambodia’s high trading costs.
24. The RGC could consider implementing an urgent reform program to address the main constraints
emerging from the ICA. The reform program, which can result into a marked improvement of the busi-
ness environment, could comprise of the following main actions:
High cost of electricity: draft a comprehensive national plan comprising the review of energy
a.
sources (including renewable) and identify specific practices that may be contributing to the
high cost of energy. Priority should also be given to improving existing agreements with neighboring
countries to ensure the steady and reliable provision of electricity to the SEZs located near
Cambodia’s borders. A regional approach towards addressing constraints currently faced by
the power sector may be more appropriate, as an isolated power sector expansion will likely require
difficult trade-offs between economic growth and environmental challenges.
Automate government processes. Corrupt and informal practices proliferate in opaque
b.
environments that often require face-to-face contact between investors and government officials.
Automation of key government processes could help to eliminate these practices by
reducing personal contact between parties and by creating a transparent online portal
for information about rules and processes required by firms. Automation has the added
advantage of creating a traceable record of transactions between the Government and the
private sector. To this end, the swift passing of the e-Commerce Law by the National Assembly
as soon as possible would enable firms to perform e-payments for government services. Both the
Ministry of Economy and Finance (MEF) and Ministry of Commerce (MOC) are implementing
automation in the areas of customs and border reform, new company registration and Certificate of
Origin (CO) that can serve as models for other ministries.
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 17
CRITICAL CONSTR AINTS
Continued improvements to trade facilitation. The important improvements made by Customs
c.
leave no room for complacency as there are still cumbersome and time-consuming procedures to
be completed manually through several agencies before import-export permits and licenses can be
obtained. By streamlining and automating these procedures, in the framework of the National Single
Window (NSW), Cambodia could improve its trade performance dramatically by contributing to
decreased trade costs and improved firm competitiveness.
The Cambodia World Bank Enterprise Survey 2012 which was carried out in seven geographic
25.
locations (an expansion beyond the boundaries of previous surveys) to include large urban
centers located in Bavet, Battambang, Kampong Cham, Koh Kong, Phnom Penh, Siem Reap and
Sihanoukville. The survey comprised firms in the Manufacturing sector, Trade (defined as domestic
trade, mostly retail), Tourism and Other sectors (comprising construction, transport and ICT). Firms in
the formal and informal sectors were included, allowing comparisons between survey responses for
the two groups for the first time. Responses have been weighted to allow for the fact that some firms
(large, formal firms, for example) were more likely to respond than others.
1.2 Key Constraints on Cambodia’s Business Environment
The three top constraints to doing business as perceived by firms are associated with electricity,
26.
corruption and anti-competitive practices.1 According to the registered enterprises surveyed,
concern about basic infrastructure reflects the success of reforms addressing some of the ‘soft
constraints’ that dominated earlier investment climate concerns of enterprises and a growing preoc-
cupation with the adequacy of reliable infrastructure as there was a substantial decline in the respondents’
preoccupation with crime, transportation, trade regulations, and business licensing (Figure 1.2).2
1
he enterprise survey will not examine ‘macroeconomic uncertainty’ in detail as it has been well documented elsewhere.
T
See Annex I for a full profile of the main constraints to doing business as reported in Cambodia across groups of firms.
2
This figure is limited to registered companies only to allow a fair comparison between the 2007 and 2012 Cambodia Enterprise
Surveys - the 2007 survey includes virtually only registered firms while the 2012 survey includes also many unregistered firms.
Firms are classified as registered if they have any type of formal registration, such as a firm registration with the Ministry of
Commerce, a tax registration with the Ministry of Finance, VAT registration, labor department registration, a registration certificate
from the provincial commerce division, registration with municipality, or registration with the Council for the Development
of Cambodia.
The Investment Climate Climate Assessment 2014
18 Creating Oppor tunity for Firms in Cambodia
CRITICAL CONSTR AINTS
Figure 1.2: Electricity, corruption and anti-competitive practices are most often ranked as the top constraint
by registered firms
Constraint
Electricity
Corruption
Anti-competitive practices
Tax rates
Economic and regulatory policy…
Worker skills and education 2012
Legal system/conﬂict resolution
Cost of ﬁnancing 2007
Access to land
Labor regulations
Crime, theft and disorder
Transportation
Telecommunications
Custom and trade regulations
Access to ﬁnancing
Business licensing
Tax administration
0% 10% 20%
Percent of registered ﬁrms
Source: World Bank Enterprise Surveys.
Electricity is the major concern of firms. Electricity is the major concern of enterprise managers
27.
regardless of size and export orientation. Not only is the price per kilowatt hour (kWh) higher in
Cambodia than almost anywhere in the region but the service is also patchy and inefficient to the
extent that diesel generators are used for about 30 percent of firms’ manufacturing. In the SEZs, where
electricity is cheaper, the intermittent supply of electricity, rather than its expense, is the main
concern of companies.
While firms agree that the top constraint is electricity, there is less agreement on the second-
28.
and third-ranked constraints. When asked to rank the top three constraints, one-third of the
respondents to the enterprise survey (both registered and unregistered firms) selected access and
reliability of electricity as their top constraint (Figure 1.3). Worries about electricity are now 50
percent higher than they were in the previous survey, whereas corruption remains a major concern
despite its decline in importance compared to previous survey (Figure 1.2). There has also been
growing worries about other factors affecting the ability of enterprises to do business. A much
smaller proportion of enterprises selected other factors than electricity such as the cost of financing
and corruption as the top constraint. In contrast, there was less unanimity about the second and
third most important impediments to doing business. Transportation, corruption and electricity were
selected as the second most important constraint by 11 to 13 percent of the enterprises. The cost of
financing was ranked highest for the third most important constraint, followed fairly closely by
corruption and anti-competitive business practices.
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 19
CRITICAL CONSTR AINTS
Figure 1.3: Electricity is the top constraint, but there is no consensus on other constraints3
Top constraints
Electricity
Cost of ﬁnancing
Corruption
Anti-competitive or informal practices
Tax rates
Economic & regulatory policy
uncertainty
Transportation
Others
0% 10% 20% 30%
Percentage of all ﬁrms
Second constraints
Transportation
Electricity
Corruption
Skills & education of available…
Economic & regulatory policy…
Anti-competitive or informal…
Cost of ﬁnancing
Others
0% 10% 20% 30%
Percentage of all ﬁrms
3
The figures do not add up to 100% because ‘macroeconomic uncertainty’ has been removed. See also footnote 1.
The Investment Climate Climate Assessment 2014
20 Creating Oppor tunity for Firms in Cambodia
CRITICAL CONSTR AINTS
Third constraints
Cost of ﬁnancing
Corruption
Anti-competitive or informal practices
Electricity
Economic & regulatory policy uncertainty
Skills & education of available workers
Tax rates
Others
0% 10% 20% 30%
Percentage of all ﬁrms
Source: World Bank Enterprise Survey, 2012.
C orruption still remains a major concern (Figure 1.3). Corruption remain a top priority for
29.
Cambodian firms, despite the fact that the average amount of informal fees paid has declined as a
proportion of overall sales is lower than for other countries in the region. Furthermore, the incidence
of informal practices has not diminished, implying that while officials may be demanding informal
fees less frequently, the proportion of firms paying informal fees has not diminished (and there are
indications that for certain activities such as importing goods, the proportion of firms paying gifts
has increased).
Concerns about corruption and, to a lesser extent, tax rates and access to finance are higher for
30.
Cambodia than its low-income comparator countries. Those concerns appear to ease as
countries move to higher levels of development. For the higher-income comparator countries,
constraints shift to the quality of governance and the capability of the state to provide services like
trade and labor regulations and business licensing that lower the number of informal enterprises
and help to level the playing field for formal enterprises. However, corruption remains high relative
to Cambodia’s level of development. Despite improvements in the level of development, Cambodia
ranks below the average of low-income countries with per capita GDP below US$2,000, measured
in 2005 constant US dollars (Figure 1.4). Some improvement has been made in terms of the prom-
ulgation of an anti-corruption law in 2010, the establishment of an anti-corruption unit, and the
introduction of an asset declaration law in early 2011. Yet, these reforms have not yet translated
into real change for the surveyed firms, as Cambodia’s ranking among all countries in the world
remains at the lower 14 percentile of values in the range.
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 21
CRITICAL CONSTR AINTS
Figure 1.4: Corruption remains problematic despite improvements in Cambodia’s level of development
Note: The graph plots the relationship between Control of Corruption Index from Worldwide Governance Indicators
project and GDP per capita in constant 2005 US dollars in the period 1996-2012. Observations refer to countries with
GDP per capita below US$2,000. Higher values of the Control of Corruption Index indicate better governance ratings.
Source: World Development Indicators.
Anti-competitive or informal practices, cost of financing, and skills and education are rated near
31.
to the top three constraints. Concern about anti-competitive or informal practices reflects worries
of enterprises in the formal sector about the advantage that unregistered or informal enterprises have
in competing in the marketplace. More than one-quarter more of all registered enterprises are more
troubled by informal business practices than they were in the previous survey. Firms are also more
worried about an inadequately educated workforce. The scarcity of a qualified workforce is due to a
disparity between the supply and demand of skills in the market and to a growing need for trained
workers in domestic industries operating within global value chains (GVCs). Cambodia’s population
continues to have a low education attainment and skills shortages for existing vacancies because of
a skills mismatch (Hong, 2013).
Concern about the cost of finance is about the same as in 2007 and therefore still high. SMEs
32.
are particularly vulnerable both to access and costs of formal sector financing of their activities. The
Government’s Program on Access to Finance aims to facilitate greater funding to SMEs. There is also
an expectation that lending risks will be lowered by the recent creation of a credit bureau to provide
information to lenders on the credit rating of borrowers (MOC, 2009). Cambodia, however, still lacks
adequate systems for collateral and access to credit guarantee facilities in order to provide security
to creditors.
Macroeconomic uncertainty is also listed as a major constraint. The stability of the macroeconomic
33.
environment—low inflation, stable financial sector—may have been eclipsed by a perception that labor
disputes and the national election, which was pending at the time of the survey, were the cause for
concern. Macroeconomic uncertainty was also widely perceived to be a problem in the 2009 ICA. As a
catch-all term, the constraint can be more easily understood as a compilation of constraints that are
dealt with in more detail in the following sections.
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22 Creating Oppor tunity for Firms in Cambodia
CRITICAL CONSTR AINTS
Customs and trade regulations have dropped dramatically as a constraint since the first ICA
34.
survey in 2003. This improvement can be credited in large part to the automation of customs and
border processes, culminating in the roll-out of the ASYCUDA customs automation software to major
borders crossings and checkpoints. This has been reflected in Cambodia’s dramatic rise of 46 rankings
in the LPI since the previous ICA.
1.2.1 Electricity
Access to electricity has worsened considerably and ranks as the top constraint reported
35.
by most firms. The percentage of all enterprises (both registered and unregistered) that identify
electricity as a major constraint is 43 percent, compared with 21 percent in 2007.4 It reflects the generally
low proportion of the population that has access to electricity in the country. With just over one-third
of the population having access, Cambodia has a lower share of the population with access to electricity
than any of its comparator countries, and electricity concerns by businesses are higher than any other
country other than Bangladesh.
Figure 1.5: Electricity concerns of businesses in Cambodia are high compared to region
100%
Percent of ﬁrms saying issue is a
"major" or "severe" constraint
80%
60%
40%
20%
0%
07 09 07 11 09 11 09 09
20 20 20 20 20 20 20 20
sh R di
a ka am di
a
ne
s
sia
ad
e PD bo La
n n bo i e
gl o i et pp on
n La Ca
m
Sr Vi Ca
m ili In
d
Ba Ph
Source: World Bank Enterprise Surveys.
Cambodia’s electric power transmission and distribution losses as a percentage of output are
36.
higher than in any comparator country.5 In addition to having the highest loss rate in the region,
Cambodia’s proportion of losses in its output has more than doubled since 2004. These electric power
transmission and distribution losses occur in transmissions between sources of supply and points
of distribution and in electricity distribution to consumers.
4
Please note that the figures for Cambodia 2007 only include registered firms.
5
Refers to the share of electric power transmission and distribution losses relative to electricity production, which is the
total number of kWh generated by power plants, separated into electricity plants and CHP plants.
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 23
CRITICAL CONSTR AINTS
Figure 1.6: Cambodia has the highest rate of electric power transmission and distribution losses as a
percentage of output
Cambodia
Sri Lanka
Philippines
Bangladesh
Vietnam
Indonesia
0% 10% 20% 30%
Percent of output
Source: World Bank Development Indicators.
Figure 1.7: Cambodia’s rate of electric power transmission and distribution losses is rising
Precent of output
30%
20%
10%
0%
2004 2007 2012
Source: World Bank Development Indicators.
A large number of businesses rely on generators to compensate for lack of access to electricity
37.
or, for those that do have access, the unreliability of that electricity. On average, 37 percent of
enterprises have generators. Among industries, tourism has the highest percentage of companies
owning generators, followed by firms in manufacturing industries other than those in the garment
and textile industry (Figure 1.8). Nevertheless, of those firms having generators, it is the ones in the
agro-processing industry that have the largest proportion of electricity originating from generators,
followed by those in manufacturing industries other than the garment and textile industry (Figure 1.9).
The reason for this consumption pattern is that the garment and textile industry tends to be more
labor intensive than the agro-processing and components industries.
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24 Creating Oppor tunity for Firms in Cambodia
CRITICAL CONSTR AINTS
Figure 1.8: Firms in the tourism and manufacturing sectors have the most generators
Firm sector
Tourim
Non-garment manufacturing
Garment munufacturing
Agro processing
Trade
Other
0% 20% 40% 60%
Percent of all ﬁrms having generators
Source: World Bank Enterprise Surveys.
Figure 1.9: Agro-processers and non-garment manufacturers get most electricity from generators
Firm sector
Agro processing
Non-garment manufacturing
Tourism
Garment manufacturing
Trade
Other
0% 20% 40% 60%
Percent of electricity frome generators for
ﬁrms that have a generator
Source: World Bank Development Indicators.
Greater dependence on generators leads to higher electricity costs. Companies in the garment
38.
and textile industry, for examples, have an average of cost of 28 US cents per kWh for electricity from
their generators, compared with an average cost of 15 US cents per kWh for electricity from the grid.
Those costs include capital, operating, maintenance and waste costs.
H ydropower is a priority area of development for the RGC. Although the hydropower sector
39.
is in an early stage of development, its expansion is already underway. Three hydropower plants are
currently being built, power transmission capacity is being upgraded, and a new coal-fired plant is being
constructed. The combined increase in supply, including that from new power lines from Vietnam and
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 25
CRITICAL CONSTR AINTS
the Lao PDR, will be close to 1,000 MW, with around half of that supply originating in the three new
hydropower plants. The expansion is expected to triple the current supply of electricity and alleviate
existing electricity-related problems currently experienced by businesses.
1.2.2 Corruption
Corruption remains a major problem in Cambodia. Over 30 percent of businesses regard corruption
40.
as a major constraint to doing business and 7 percent consider it to be their main problem (Figure
1.10). Although the proportion of businesses that view corruption as a major constraint has decreased
compared with the proportion reported in 2007, Cambodia still leads the region in having the
highest share of firms that consider corruption to be their main constraint to doing business. Likewise,
Cambodia has the lowest rating in the region for transparency, accountability and corruption (Figure
1.11). In that assessment, Cambodia’s rates 2.0 on a scale of 1 (low) to 6 (high), which represents a
decline from of 2.5 in 2009.6
Figure 1.10: Cambodia has the lowest rating for transparency, accountability and corruption (2012)
Nepal
Vietnam
Sri Lanka
Lao PDR
Bangladesh
Cambodia
0 1 2 3
Source: World Bank Development Indicators.
Note: on a scale of 1 (low) to high (6).
Source: World Bank, Country Policy and Institutional Assessment (CPIA) database.
Transparency, accountability, and corruption in the public sector is based on governance aspects and a broader coverage of social
6
and structural dimensions that include a set of 16 criteria grouped into four clusters associated with economic management,
structural policies, policies for social inclusion and equity, and public sector management and institutions. For details, see
World Bank, “CPIA transparency, accountability, and corruption in the public sector rating (1=low to 6=high)” at http://data.
worldbank.org/indicator/IQ.CPA.TRAN.XQ.
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26 Creating Oppor tunity for Firms in Cambodia
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Figure 1.11: Cambodia still leads region in share of firms that see corruption as the main problem
Cambodia 2007
India 2010
Percent of ﬁrms
saying Carruption
Bangladesh 2007 is a “major” or...
Sri Lanka 2011
Lao PDR 2009
0% 50% 100%
Source: World Bank Enterprise Surveys
Figure 1.12: Cambodian firms expect to make informal payments to get things done
Cambodia ( 2012 )
Bangladesh ( 2007 )
Cambodia ( 2007 )
Vietnam ( 2009 )
Lao PDR ( 2009 )
Philippines ( 2009 )
Indonesia ( 2009 )
Sri Lanka ( 2009 )
0% 20% 40% 60% 80%
Percent of ﬁrms expecting to provide Informal gifts and payments
Source: World Bank Enterprise Surveys
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Creating Oppor tunity for Firms in Cambodia 27
CRITICAL CONSTR AINTS
Figure 1.13: The cost of securing a government contract often includes bribes
1.5%
1.0%
0.5%
0.0%
s rm ed ed
rm ﬁ n wn
in gﬁ ing -ow n-o
ort ort al ly
reig
p xp tion Fo
Ex n-e
No Na
Informal payment as a percent of total contract value for all ﬁrms
Source: World Bank Development Indicators.
Most firms expect to make informal payments to public officials in order to get things done.
41.
Nearly all businesses regard gift-giving or informal payments to public officials as a regular part of
the cost of obtaining permits or generally dealing with government procedures. Half of all registered
enterprises make those types of payments frequently, most of the time, or always (Figure 1.14). These
practices apply to procedures and practices across a wide range of government activities, including
taxation, business registration, trade processes, construction permits and others. Having a close
personal relationship with political leaders is regarded as being an effective way to get things done, and
over two-thirds of businesses regard these ties as having a moderate, major or essential influence on
whether they succeed in getting things done.
Figure 1.14: Most firms expect to make gifts or informal payments to officials…
Never
3%
Seldom
13% Always
18%
Most times
10%
Sometimes
34% Frequently
22%
Percent of all ﬁrms expecting to make informal payments
Source: World Bank Enterprise Survey, 2012.
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28 Creating Oppor tunity for Firms in Cambodia
CRITICAL CONSTR AINTS
Despite the pervasiveness of informal payments, these costs absorb only a small proportion
42.
of business revenue. The amount of informal payments and gifts that businesses expect to make as
a percentage of their total business sales revenue is the lowest in the region. The ratio has fallen from
5 percent in 2007 to 1 percent, which is relatively small compared with a ratio of 8 to 10 percent in
Bangladesh and the Philippines, respectively (Figure 1.15). Nonetheless, informal payments often
impose a heavy management burden in terms of time expended in dealing with public officials.7
Figure 1.15:…but the overall cost of informal payments is low
Philippines (2009)
Bangladesh (2007)
Cambodia (2007)
Indonesia (2009)
Sri lanka (2011)
Vietnam (2009)
Lao PDR (2009)
Cambodia (2012)
0% 3% 5% 8% 10%
Informal payments as percent of total revenue from sales of all ﬁrms
Source: World Bank Enterprise Surveys.
Corruption motivates firms to remain small and informal. In Cambodia, small firms often maintain
43.
their small-scale as a way of being less exposed to corrupt practices than medium- to large-size
enterprises. In this manner, they are able to make fewer informal payments to officials in order to get
things done. This approach works better in agro-processing than in manufacturing, tourism and trade
industries, where the incidence of corruption for enterprises not registered with the Ministry of
Commerce (‘Informal’) remains high (Figure 1.16). Likewise, firms tend to remain in the informal sector
as a way of avoiding informal fees or gifts, as well as taxes that often need to accompany procedures
associated with the RGC’s administrative and regulatory requirements. Overall, however, a substantially
higher proportion of enterprises registered with the Ministry of Commerce (‘Formal’) (90 percent) than
informal businesses (80 percent) usually needs to offer gifts or informal payments to government
officials, which encourages and promotes informal business practices, a situation that gives rise to the
third most cited constraint to doing business resulting from anti-competitive business practices.
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Creating Oppor tunity for Firms in Cambodia 29
CRITICAL CONSTR AINTS
Figure 1.16: Vulnerability of small firms varies across
100%
Formal
75%
Informal
50%
25%
0%
Agroprocessing Manufacturing Trade Tourism Other
Firms reporting informal payment during meetings with or inspections of tax ofﬁcials
Source: World Bank Enterprise Survey, 2012.
Figure 1.17: Most registered firms give gifts or informal payments to officials
Formal
Never 5%
Seldom 5% Always 20%
Sometimes 33% Most time 18%
Frequently 20%
Frequency of informal payments
Source: World Bank Enterprise Survey, 2012.
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30 Creating Oppor tunity for Firms in Cambodia
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Figure 1.18: Most unregistered firms give gifts or informal payments to officials
Informal
Never 3%
Always 17%
Seldom 17%
Most times 6%
Frequently 23%
Sometimes 34%
Frequency of informal payments
Source: World Bank Enterprise Surveys, 2012
Corruption also lowers investment incentives. In some cases, firms limit their vulnerability to
44.
potential corruption by forfeiting potentially profitable ventures in order to remain small and informal
and thereby reduce their visibility to public authorities. This risk-avoidance strategy lowers the efficiency
and potential investment by firms in areas that would otherwise expand and helps to diversify their
activities. Those investment disincentives extend to foreign investors, who are often deterred from
entering the Cambodian market by perceptions of high levels of corruption, unless those potential
losses can be offset by lucrative deals. These types of risk-aversion behaviors represent a key barrier
to higher enterprise productivity and expansion, and they also lower the potential revenue collection
by the public sector.
1.2.3 Taxes and regulations
Cambodia’s administrative burden of paying taxes and contributions has grown considerably.
45.
Notwithstanding an official tax rate of 21 percent that is half the average tax rate of comparator
countries, over one-fourth of managers say that taxes remain a major or severe constraint to their doing
business (Figures 1.19 and 1.20). That concern on the part of managers is significantly larger than the
average of the comparator countries, and it is substantially worse than it was in 2007 when only 16
percent of managers regarded taxes as a major constraint.
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Creating Oppor tunity for Firms in Cambodia 31
CRITICAL CONSTR AINTS
Figure 1.19: Tax in Cambodia is lower than comparators
Sri Lanka
Indonesia
Cambodia
Philippines
Total tax rate
Lao PDR (% proﬁt)
India
Payments (number
Vietnam per year)
Bangladesh
0 20 40 60
Note: Total taxes as a percent of profits and number of payments a year
Source: World Bank Doing Business.
Figure 1.20: …but many managers say tax is a major constraint
Lao PDR (2009)
Philippines (2009)
Sri Lanka (2011)
Percent of ﬁrms
Cambodia (2012)
saying taxes is a
Cambodia (2007) "major" or "severe"
constraint
Vietnam (2009)
Percent of ﬁrms
Indonesia (2009) saying taxes is their
"main" constraint
Bangladesh (2007)
0% 10% 20% 30% 40% 50%
Source: World Bank Enterprise Surveys.
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32 Creating Oppor tunity for Firms in Cambodia
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Several factors explain the large administrative burden on managers in making tax payments,
46.
notwithstanding the fact that the direct cost of mandatory contributions to taxes has remained
low and relatively unchanged. First, the average number of 40 required payments each year is
one-third higher than in 2007. Second, the number of hours a year spent preparing, filing and paying the
major types of taxes has escalated from 137 to 173 hours. Third, the share of enterprises other than
garment ones that make informal payments to tax officials has increased to 65 percent from 60
percent in 2007. Of these, a much larger share of small-size enterprises make informal payments than
do medium-size ones, and medium-size enterprises make more informal payments to officials than
do large size ones (Figure 1.21). And for all enterprises sizes, a much smaller proportion of garment
enterprises make informal payments than other types of enterprises, largely because their taxes are
subject to important tax incentives.
Figure 1.21: Small firms in non-garment industries report making most informal payments to tax authorities
Non-garment
Large
Garment
Medium
Small
0% 25% 50% 75%
Percent of all enterprises in category
Source: : World Bank Enterprise Survey, 2012.
Despite tax incentives, the share of foreign and export-oriented enterprises that regards taxes
47.
as their main constraint has grown. That share has actually risen in all categories (Figure 1.22). These
enterprises include manufacturing and non-manufacturing activities, export and non-export oriented
industries, and foreign and domestic enterprises. Nevertheless, the largest increase has occurred in
non-manufacturing activities, while the share of domestic enterprises that now regards taxes as their
main constraint has increased somewhat more than foreign enterprises.
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Creating Oppor tunity for Firms in Cambodia 33
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Figure 1.22: More firms consider taxes the main constraint
Manufacturing
Non-manufacturing
Exporting
Non-exporting 2012
Foreign 2007
Domestic
0% 2% 4% 6% 8% 10% 12%
Percent of registered ﬁrms that identify taxes as their "main" constraint
A smaller proportion of enterprises regard government regulations as a major constraint, even
48.
though the administrative burden of those regulations has increased. The share of businesses
that regard licensing and permit gathering as a major constraint is now only 5 percent compared with
8 percent in 2007 (Figure 1.23). That proportion is considerably less than it is in comparator countries
like Sri Lanka, where 20 percent of firms consider the licensing and permit process a major burden
on their businesses. Most other comparator countries have a higher share than Cambodia, albeit with
proportions that are well below that of Sri Lanka. Only in the Lao PDR and Vietnam do enterprise
managers have a lower proportion than Cambodia that considers the licensing and permit-gathering
process to be a major burden.
Figure 1.23: Fewer firms regard licensing and permits as a major constraint
Sri Lanka (2011)
Bangladesh (2013)
Cambodia (2007)
Philippines (2009)
Indonesia (2009)
Cambodia (2012)
Lao PDR (2009)
Vietnam (2009)
0% 4% 8% 12% 16% 20%
Percent of all ﬁrms
Source: World Bank Enterprise Surveys.
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34 Creating Oppor tunity for Firms in Cambodia
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Despite the improved perception about this possible constraint on businesses, the bureaucratic
49.
and administrative process for licensing and permit gathering has become more difficult in
Cambodia. On average, the number of days needed to process licenses and permits has increased by
10 percent since 2007 (Figure 1.24). Yet this average belies large variations across agencies. The number
of days required to obtain registration certificates in the provinces has nearly doubled since 2007, and
the number of days to register a company at the MoC has increased from 13 to 21 days, reflecting
a 60 percent increase in the number of days spent on the process. More days are also needed for
labor registration (from 16 days in 2007 to 18 days in 2012) and tax registration (from 20 to 23 days).
Only in the cases of administrative processes required in municipalities and the Council for the
Development of Cambodia (CDC) have the number of days fallen (by 29 and 12 percent, respectively).
Figure 1.24: The number of days needed for administrative requirements has risen
Tax registration (MOF)
Council for Development of Cambodia…
Firm registration (MOC)
Registration certiﬁcate (provincial… 2012 2007
Labor registration
Municipality
VAT registration
0 10 20 30
Total days for processing in indicated agencies by all ﬁrms
Source: World Bank Enterprise Surveys.
Two-thirds of enterprises pay informal fees worth over one-fifth of the official cost of their licenses
50.
and permits. Official fees at each agency average US$156, and they range from US$80 to register
in municipalities to US$321 to register a business at the MoC. On top of those fees, two-thirds of the
firms must pay informal fees to officials to process and issue the required registrations and licenses.
Those informal fees average US$32 for each agency, and they range from US$18 for registration
certificates in provincial offices to US$54 for a business registration at the MoC. The largest informal
fees relative to their official costs are collected for the required declaration to the Ministry of Labor
when hiring or dismissing employees. There are also a number of other procedures that apply to
enterprises with at least eight employees that range from the establishment of internal regulations
that conform to the general provisions of the labor code8.
For details on the required procedures, see section 10 on “notify the Ministry of Labor of the start of operations and hiring of
8
employees” in IFC (2013a).
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Creating Oppor tunity for Firms in Cambodia 35
CRITICAL CONSTR AINTS
Figure 1.25: Informal fees cost 14-28% of each license and permit
$400 100%
Percentage of
applications
$300 requiring informal 75%
fees
$200 50%
$100 25%
$- 0%
Firm Tax VAT Labor Registration Municipality
registration registration registration registration certiﬁcate
(MOC) (MOF) (provincial
ofﬁce)
Informal fees ($) Total fee ($) Percentage of applications requiring informal fees
Source: World Bank Enterprise Survey, 2012.
Figure 1.26: Large firms require most licenses and permits
Manufacturing
Tourism
Large
Other
Medium
Trade Small
0 3 6 9
Number required by all ﬁrms
Source: World Bank Enterprise Survey, 2012.
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36 Creating Oppor tunity for Firms in Cambodia
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Figure 1.27: Senior managers of large non-garment firms spend the most time dealing with regulatory
requirements
Large
Medium
Garment
Non-garment
Small
0% 2% 4%
Percent of managers’ work time
Source: World Bank Enterprise Survey, 2012.
Large-size enterprises require more licenses and permits and spend the most time dealing with
51.
them. On average, large non-agro-processing manufacturing firms require 8.5 licenses and permits
to operate, compared with 2.5 for small-size enterprises and 4 for medium-size enterprises. Large
tourism companies also need considerably more licenses and permits than small- and medium-size
firms. These differences are reflected in the much greater time that senior managers spend on dealing
with license and permit requirements. Senior managers of large non-garment enterprises in particular
spend over 4 percent of their time dealing with permits and licenses, compared with an average of
only 1 percent for managers of small and medium-size firms, whether or not they are part of the
garment industry. Overall, however, the average time spent by all senior managers, regardless of
firm size, has declined greatly since 2007 when the average time was over 9 percent of their time. Back
then, only managers in the Philippines spent more time than Cambodian managers in dealing
with regulations. The time currently being spent on dealing with regulations is lower than in any
comparator country.
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Creating Oppor tunity for Firms in Cambodia 37
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Figure 1.28: Confidence in the judicial enforcement of contracts is low
tend to
disagree 25%
disagree in
most cases 3%
tend to agree
56% fully disagree 2%
fully agree1%
Percent of all enterprises agree in most
cases 13%
Source: World Bank Enterprise Survey, 2012.
Businesses lack confidence in the judicial system to enforce their contractual and property
52.
rights in business disputes. Only 14 percent of enterprises usually or always have confidence in
the judicial system, which is a substantial decline from 25 percent who expressed such confidence in
2007. This deterioration parallels Cambodia’s declining ranking for contract enforcement, which in
2013 fell to 162 out of 189 countries from a rank of 134 out of 181 countries in 2007 (IFC, 2014). Another
way to view this situation is that 86 percent of countries now have a better ranking than Cambodia,
compared with 74 percent of countries that had a better ranking in 2007. The main reason for the
worsening of Cambodia’s ranking is that the time required to resolve a commercial lawsuit between two
domestic businesses has increased from just over 400 days to 483 days, a 20 percent increase, even
though costs and procedural complexity have remained the same.
On the positive side, the proportion of enterprises that regard the legal system as a severe
53.
constraint to doing business continues to decline. The share of businesses that rate the legal
system as a major or severe constraint has declined to 7 percent from 11 percent in 2007 and 31 percent
in 2003. This substantial reduction reflects the small number of disputes that end up in court since,
as the early ICA indicated, they tend to be resolved through arbitration or simply remain unresolved.
According to the US Commercial Service for Cambodia, local and foreign businesses report frequent
problems with inconsistent judicial rulings, corruption, and difficulty enforcing judgments (US
Department of Commerce, 2013). For these reasons, most commercial disputes are currently resolved
through negotiations facilitated by the MoC, the CDC, the Cambodian Chamber of Commerce, and
other concerned institutions. To facilitate the process, Cambodia adopted a Commercial Arbitration
Law in 2006, and in 2010 the RGC provided for the establishment of the National Arbitration Center,
which was officially launched in March 2013 as the first alternative dispute resolution mechanism
to enable companies to resolve commercial disputes more quickly and inexpensively than through the
court system.
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38 Creating Oppor tunity for Firms in Cambodia
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1.2.4 Labor
Cambodian firms rank the lack of skilled and trained workers the same as the highest ranking
54.
comparator country. Over one-fifth of all firms believe that inadequately trained or educated workers
impede their productivity and growth. Among the comparator countries, only Bangladesh has a higher
share of firms that is concerned about this constraint to doing business. That proportion is 60 percent
higher than it was in 2007 (Figure 1.29).
Figure 1.29: Many Cambodian firms rate lack of skills and training as a major constraint
Bangladesh (2013)
Cambodia (2012)
Lao PDR (2009)
Sri Lanka (2011)
Cambodia (2007)
Vietnam (2009)
Philippines (2009)
Indonesia (2009)
0% 5% 10% 15% 20% 25%
Percent of all ﬁrms
Source: World Bank Enterprise Surveys, 2012
Figure 1.30: Lack of skills and training is increasing in all sectors
Garment
Manufacturing
Trade
2012
Tourism
2007
Other
0% 20% 40% 60%
Percent of registered ﬁrms
Source: World Bank Enterprise Surveys, 2012
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 39
CRITICAL CONSTR AINTS
All types of enterprises lack competent workers. While the proportion of large-size enterprises
55.
that are constrained by inadequate levels of trained or educated workers is the largest among the
different types of enterprises, on average the share of all businesses that consider this constraint to
be a major or severe constraint has increased by more than 75 percent since 2007. For large-size
enterprises, however, the share is more than twice as high as in 2007. Among sectors, the share of
garment industry managers that regard inadequately trained workers to be a major constraint has risen
to 55 percent from only 17 percent in 2007, and those in other manufacturing industries that include
agro-processing has risen from 19 to 37 percent.
C ambodia’s overall productivity has improved substantially, but that of the manufacturing
56.
sector has worsened. Overall, total factor productivity (TFP) is more than 50 percent higher than
in 2007. In contrast, that of manufacturing is 87 percent of its 2007 level (Figure 1.31).
Figure 1.31: Cambodia’s overall productivity has improved, but manufacturing productivity lags
Philippines 2009
Vietnam 2009
Cambodia 2012 TFP Overall
Lao PRD 2009 TFP of Manufacturing Sector
Sri Lanka 2011
Cambodia 2007
Bangladesh 2007
0% 100% 200% 300%
Note: TFP relative to that of Cambodia in 2012. TFP is calculated based on estimates of the log-linear relationship
between output and capital, labor and a set of country-specific dummies.
Source: World Development Indicators.
Cambodia has improved it productivity relative to the comparator countries. The country has
57.
somewhat higher overall productivity growth than the Lao PDR, Sri Lanka and Bangladesh, but productivity
growth in the manufacturing sector is below all the comparator countries except Bangladesh.
Efficiency gains, reflected in the overall improvement in TFP, are associated with customs
58.
automation, better logistics infrastructure and reduced labor conflicts. Customs automation
now covers almost all customs declaration processes. Its countrywide implementation since mid-2012
has helped to reduce the average number of days for exports to clear customs from 4.3 to 2.7 days
between 2007 and 2013, although no comparable change has occurred in imports. Progress has been
particularly noticeable in reforming and modernizing import, export and transit operations through
the streamlining and harmonization of customs procedures in line with international standards.
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40 Creating Oppor tunity for Firms in Cambodia
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Export-oriented domestic firms have the highest proportion of managers who consider the
59.
inadequately trained and educated labor force to be a major constraint to their businesses.
Although the proportion of domestic firms is only 4 percentage points higher than that of foreign
companies, the increase in the share of domestic firms rating the labor force as being a major constraint
has increased much more than that of foreign firms (27). In fact, the proportion has grown by 85 percent
for domestic firms, whereas that of foreign firms is slightly lower. For export-oriented firms, the propor-
tion of managers who view the inadequately trained labor force as a major constraint has more than
doubled since the last enterprise survey, which is twice as high as the increase in non-export oriented
businesses (Figure 1.33).
Figure 1.32: Domestic firms are suffering more from the lack of skills and training…
30%
2007
20%
2012
10%
0%
Domestic Foreign
Percent of registered ﬁrms in 2007 and 2012
Source: World Bank Enterprise Surveys.
Figure 1.33: …while exporters are suffering more than non-exporters from the lack of skills and training
30%
2007
20%
2012
10%
0%
Non-exporting Exporting
Percent of registered ﬁrms in 2007 and in 2012
Source: World Bank Enterprise Surveys.
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Creating Oppor tunity for Firms in Cambodia 41
CRITICAL CONSTR AINTS
The large increase in the share of firms that considers the inadequately trained labor force to
60.
be a major constraint is associated with the introduction of more manufacturing activity into
the economy. Estimates of the relationship between that constraint and possible explanatory factors
indicate that changes in manufacturing activity have a positive influence on the constraint, whereas the
introduction of modern technologies into companies has reduced the constraint’s importance (Figure
1.34). The garment industry and other labor-intensive manufacturing industries have attracted a large
number of unskilled migrants from rural areas and away from agriculture and the informal economy.
Initially, low barriers to entry in the form of low education and skills requirements in the garment
and other manufacturing industries provided much of the impetus for growth of those industries.9
Nevertheless, increasing competitiveness in the export markets has given rise to a need for more
skilled middle-level managers to oversee and train production-line workers. But so far only 1
percent of employed Cambodians have formal technical and vocational education and training
(TVET) (Brixie, 2012). In comparison to other countries in the region, Cambodia has the smallest
share of people enrolled in TVET at the upper-secondary and tertiary levels (World Bank, 2012).
Figure 1.34: Manufacturing positively influences the skill constraint, new technology reduces its importance.
60%
40%
20%
0%
-20%
New Age of ﬁrm Skills largest No. of full- Labor Manufacturing
technology constraint time workers productivity
-40% added (2009- (2009)
2012)
Percent of all ﬁrms
Source: Estimates derived from data in World Bank Enterprise Survey, 2012.
The supply of technical and vocational workers lags far behind enterprise demand. About 87
61.
percent of the employees required by enterprises approved by CDC are skilled and unskilled manual
workers (Heng, 2013). Most of the requirements for workers with advanced degrees are concentrated
in the services sector, which requires a relatively small number of accountants, managers and lawyers.
In 2012, however, higher education institutions produced around 29,000 graduates for a market
with 16,000 available positions, and in 2014 the expectation is that nearly 70,000 graduates will be
available for less than 22,000 available positions (D’Amico, 2012). These figures show that while the
excess supply of university graduates increases, there is a growing deficit in the number of workers
with vocational and technical skills. In 2010-12, for example, the skills mismatch resulted in fewer than
7,000 applicants for nearly 36,000 jobs monitored by the National Employment Agency (Heng, 2013).
9
For a description of the garment industry and employment issues in the garment industry, see Dasgupta and Williams (2011).
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42 Creating Oppor tunity for Firms in Cambodia
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Businesses remain wary of investing in training workers in supervisory knowledge and skills
62.
for fear of losing newly trained workers to competing factories. Only 22 percent of non-production
employees and 18 percent of production workers received formal training in 2012-13. To compensate
for the lack of training within companies, centers are being established for key industries, most
notably Better-Factories-Cambodia under an International Labour Organization (ILO) program; the
USAID-funded Garment Industry Productivity Center; and the Garment Manufacturers Association
in Cambodia (GMAC). The RGC has also taken action to improve labor market information through
the creation of a National Employment Agency to promote vocational training through a National
Training Agency in an effort to better balance higher education and technical and vocational educa-
tion and training, and thereby provide more graduates with the relevant and quality expertise needed
by businesses.
1.2.5 Finance
Access to finance ranked as the 10th most cited major or severe problem to doing business.
63.
Cambodia has a relatively small share of businesses that regards access to finance as a major problem
relative to comparator countries (Figure 1.35).
Figure 1.35: Cambodia does comparatively well in access to finance
Bangladesh (2013)
India (2010)
Sri Lanka (2011)
Lao PDR (2009)
Indonesia (2009)
Cambodia (2007)
Vietnam (2009)
Philippines (2009)
Cambodia (2012)
0% 15% 30% 45%
Percent of all ﬁrms
Source: World Bank Enterprise Surveys.
Use of banking services is relatively low. The proportion of enterprises having bank accounts
64.
is only 12 percent, which is the lowest rate in the region (Figure 1.36). Yet 22 percent of enterprises
have bank loans or lines of credit, which is higher than the shares in either Indonesia or the Lao PDR.
Those figures suggest that 12 of the 22 percent share of firms that have loans are enterprises with
bank accounts and the remaining 10 percentage points are unbanked enterprises.
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Creating Oppor tunity for Firms in Cambodia 43
CRITICAL CONSTR AINTS
Figure 1.36: Only a few Cambodian firms use banking services
Philippines (2009)
Bangladesh (2013)
Lao PDR (2009)
Sri Lanka (2011)
Vietnam (2009)
Indonesia (2009)
Firms with bank accounts
Cambodia (2012) Firms with bank loans
0% 25% 50% 75% 100%
Percent of all enterprises
Source: World Bank Enterprise Surveys.
Small-size enterprises and firms in the trade and agro-processing industries have the largest
65.
share of bank loans or lines of credit. The share of registered small-size enterprises with loans
or lines of credit has increased to 31 percent from only 18 percent in 2007 (Figure 1.37). In contrast,
the proportion of large-size enterprises with loans or lines of credit has decreased to 14 percent from
37 percent in 2007. However, among large-size enterprises, banks prefer to lend to those enterprises
in the garment industry (Ung & Hay, 2011). Additionally, there have also been substantial shifts
across sectors. All the major sectors have higher proportions of loans and lines of credit than
before (Figure 1.38).
Figure 1.37: Small firms have most credit with financial institutions
Large
Medium 2012
2007
Small
0% 15% 30% 45%
Percent of registered ﬁrms
Source: World Bank Enterprise Surveys.
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44 Creating Oppor tunity for Firms in Cambodia
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Figure 1.38: All major sectors have more credit than before
0% 10% 20% 30% 40%
Tourism
Other manufacturing
Agro processing
Trade
2007
Other
2012
Percent of registered ﬁrms
Source: World Bank Enterprise Surveys.
Small- and medium-size enterprises (SMEs) have limited access to finance and confront
66.
credit rationing or risk premiums. The larger proportion of bank loans directed to SMEs rather
than larger firms reflects the dominance of smaller businesses in the economy. SMEs represent 99
percent of firms and absorb 45 percent of workers, yet as recently as 2010 commercial banks only
provided 1 percent of their working capital and 1.7 percent of their investment capital (IFC, 2010)
to those firms. What limits those loans is that, despite the high liquidity of the banking system,
banks have difficulty in lending to smaller-size enterprises because the country’s weak financial
infrastructure makes enforcing loan agreements difficult and liquidating collateral very uncertain
(Harvie, Narjoko and Oum, 2013). The limited amount of financial information resulting from weak
accounting standards and the absence of a credit information sharing system also limits the
ability of banks to evaluate the creditworthiness of borrowers. For those enterprises that are
not registered, banks face even greater challenges in evaluating their creditworthiness.Banking
institutions therefore ration credit to SMEs or apply high risk premiums on lending to those types
of businesses, especially for SMEs that are not registered.
Domestic registered businesses have the largest share of loans. The proportion of firms
67.
registered with the Ministry of Commerce with loans is more than twice as high as the unregistered
ones (Figure 1.39). At the same time, domestic firms that are registered have over 50 percent more
loans than foreign enterprises. Also, bank loan applications by registered firms are nearly always
approved, and only 1 percent of applications are rejected (Figure 1.40).
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Creating Oppor tunity for Firms in Cambodia 45
CRITICAL CONSTR AINTS
Figure 1.39: Twice as many registered firms have loans as informal ones
40%
30%
20%
10%
0%
Formal Informal Foreign National
Percent of ﬁrms
Source: : World Bank Enterprise Survey, 2012.
Figure 1.40: Bank loan applications are overwhelmingly accepted
Application
rejected
1%
Approved
Percent of all ﬁrms
Source: World Bank Enterprise Survey, 2012.
For those registered firms that need a loan, the complexity of application procedures and high
68.
interest rates are regarded as the main reason for not applying for a loan. Most firms do not need
a loan (Figure 1.41). Among those that do but do not apply for one, half are dissuaded by the complexity
of the application process, and another 38 percent consider the interest rates on the loans to be
too high. While large-size firms are mainly concerned with the cost of financing, small-size enterprises
regard the collateral requirements to be an important constraint to getting a loan, albeit a smaller
problem than the complexity of the application procedure. Land, buildings and other physical assets
are the main forms of collateral required by banks, although personal assets of the business owner
are also commonly accepted. The average value of collateral as a percentage of loans is reported to
be over 50 percent of the value of the loan, which is often prohibitive for smaller-size enterprises.
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46 Creating Oppor tunity for Firms in Cambodia
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Figure 1.41: Most firms do not need loans
Application procedures
are complex, 8%
Interest rates were not
No need for favorable, 6%
a loan, 84% Other, 17% Collateral requirement
were too high, 1%
Did not think it would
be approved, 0%
Insufﬁcient size loan, 0%
Other, 2%
Percent of all ﬁrms
Source: World Bank Enterprise Survey, 2012.
1.2.6 Trade and Logistics
Although relatively few firms regard customs and trade regulations as a major constraint, a
69.
large proportion of those firms that are export-oriented do regard them as a major constraint.
Overall, the proportion of enterprises that rates customs and trade regulations as a significant
problem is almost half of that in 2007, when it was 13 percent (Figure 1.42). Nevertheless, of the export-
oriented businesses, over three-fourths of non-garment enterprises consider these regulations to be
a major or severe constraint on their growth and productivity (Figure 1.43). The lower share for garment
exporters (14 percent) reflects preferential treatment given to the industry under the RGC’s trade
and development strategy (WTO, 2011). That strategy streamlines procedures for garment and
textile exports in special government offices within the General Department of Customs and Excise
(GDCE), which make it easier for businesses to get joint inspection reports from Customs and
Camcontrol (ESCAP, 2012).
Figure 1.42: Fewer Cambodian firms now perceive Customs regulations as a major constraint
Bangladesh 2007
Sri Lanka 2011
Philippines 2009
Cambodia 2007
Vietnam 2009
Lao PDR 2009
Cambodia 2012
Indonesia 2009
0% 5% 10% 15%
Percent of ﬁrms
Source: World Bank Enterprise Surveys.
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Creating Oppor tunity for Firms in Cambodia 47
CRITICAL CONSTR AINTS
Figure 1.43: Non-garment exporters have the greatest concerns about Customs constraints
Garment Exporting
Non-garment
0% 10% 20% 30% 40% 50%
Percent of ﬁrms
Source: World Bank Enterprise Survey, 2012.
The monetary and time-related costs of export registrations contribute to Cambodia’s high
70.
trading costs. CO are issued by the Cambodian MoC in order to comply with rules of origin require-
ments by foreign customers. A recent study found that the annual CO registration cost of around
US$200 sometimes escalates to US$800 because of the addition of informal payments to expedite
the registration process (Artuso & Reyes, 2013). For exports, however, a recent reform introduced
by MoC has eliminated the obligation to register for a CO each year. The study also found that there
are CO fees applied to each container, ranging from US$23 to US$58 for each container based on
the size, destination and type of goods being shipped. For garments, exporters report having to pay
an additional fee of US$30 for each container related to so-called export management costs. In addition
to these monetary costs, there are time-related costs associated with processing the certificates,
which according to some footwear exporters can take up to two weeks for each container. These large
monetary and time-related expenses contribute to an overall trading cost in Cambodia that is, on
average, 40 percent higher than in other countries in the region and which significantly undermines the
international competitiveness of Cambodian exporters.
The World Bank’s Trade Development Support Program (TDSP) has helped to reduce trade
71.
transaction costs. The program, which is being implemented between March 2009 and March 2015,
has enabled trade sector-wide approach (SWAp) roadmaps to help automate the MoC, develop a trade
portal and trade depository, automate CO, automate Customs at various checkpoints, facilitate trade by
decreasing time needed to import and export, provide faster port handling, and reduce the number of
inspections (Clarke, 2013).10
10
he project consists of the following four components: Component 1 supports the application of appropriate IT to border management
T
activities to streamline operations, improve the level of transparency and accountability and facilitate the achievement of all border
related government objectives. Component 2 finances (a) technical support to the Ministry of Commerce’s Department of Export
Promotion to establish the exporter technical assistance window, and (b) a technical assistance matching grant facility that cover 50
percent of the cost of achieving market standards, or evidence of compliance with those standards. Component 3 on the Private
Participation in Infrastructure and Investment Component finances a program of capacity building to implement the Law
on Concessions and the Amended Law on Investment. Component 4 finances (a) the establishment and maintenance of a website
in the Khmer language to make readily available to the public the final judgments of all cases in the Supreme Court and in the Court
of Appeal; (b) the establishment and maintenance of a website to ensure the electronic publication of all Cambodian laws, related
regulations and draft legislation in the commercial law field, broadly defined; and (c) training to use the established systems.
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48 Creating Oppor tunity for Firms in Cambodia
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Businesses have inadequate information about trade-related regulations. While 37 percent of
72.
enterprises consider that they have sufficient information about domestic regulations, only 3 percent
report having adequate information about customs and trade-related regulations (Figure 1.44). To
overcome this problem, the RGC has made the transparency of trade rules and laws one of the strategic
outcomes of the Cambodia Trade Integration Strategy, 2013-18 (Ministry of Commerce, 2013). In
support of that effort, the RGC plans to establish online access to customs tariffs and other trade
regulations in its national trade repository (Ministry of Environment, 2012).
Figure 1.44: Firms need more information about trade regulations
Taxes
Registration processes
Labor regulations
Environmental regulations
Import fees
Import regulations
Export regulations
Export fees
0% 15% 30% 45%
Percent of ﬁrms
Source: World Bank Enterprise Survey, 2012.
C ambodia has relatively high and rising trading costs. Cambodia’s cost of either importing or
73.
exporting a container is 30 percent higher than the median cost of its comparator countries (Figure
1.45 and 1.46). Moreover, the number of documents and average number of days required to process
exports and imports are all higher than the average of the comparator countries. These higher
regulatory and processing burdens parallel the deterioration in Cambodia’s trading cost competitive-
ness. Between 2007 and 2013, the average cost of importing or exporting a container rose by 9 to
10 percent. This increasing cost contrasts sharply with the decline of container shipping costs in
comparator countries, which fell an average of 5 percent over the same period. Only Bangladesh had
a significant cost increase, while the Lao PDR registered a modest increase. If Bangladesh is excluded,
then the average price of exporting and importing a container in the comparator countries fell by 12
percent, which suggests a substantial deterioration in Cambodia’s competitiveness in trading costs.
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 49
CRITICAL CONSTR AINTS
Figure 1.45: Cambodia’s border export costs are high.
50 Documents to export (number) $5,000
Time to export (days)
0 $0
s ia a m ia R h
ine es a nk na od PD d es
ipp on iL et b o la
il Ind Sr Vi Ca
m La g
Ph Ban
Number of documents to export,
days to export, and cost to export
Source: World Bank Doing Business.
Figure 1.46: …and so are its import costs
40 $4,000
Documents to import (number)
Time to import (days)
30
Cost to import (US$ per container)
20 $2,000
10
0 $-
s h
ine nk
a
am e sia dia DR es
p La et
n on bo oP ad
ip i Vi gl
hil Sr Ind Ca
m La n
P Ba
Number of documents to import,
days to import, and cost to import
Source: World Bank Doing Business.
Cambodia’s LPI has made impressive gains. There has been a remarkable rise of 46 places in
74.
Cambodia’s LPI ranking to 83rd place out of 160 countries from 129th place four years earlier. The time to
clear Customs has fallen from 5.9 days in 2010 to only 1.4 days in 2014. The percentage of consignments
selected for inspection has fallen from 29 percent in 2010 to 17 percent in 2014, suggesting that Customs’
efforts to improve risk management are paying off. As a result, Cambodia compares favorably with other
countries in the region, outperforming the Lao PDR, for example (Figure 1.48).
The Investment Climate Climate Assessment 2014
50 Creating Oppor tunity for Firms in Cambodia
CRITICAL CONSTR AINTS
Figure 1.47: Costs are rising, time taken is falling
Average number of documents to
45 import & export
Average days to import & export
$850
Average cost to import & export
(US$/container)
30
$800
15
- $750
2006 2008 2010 2012 2014
Source: : World Bank Doing Business.
Figure 1.48: Improvements in Cambodia’s LPI score is helping it move to full participation in the AEC 2015
Philippines
3.25
Lao PDR 2.75 Vietnam
2.25
Cambodia Indonesia
Sri Lanka
Source: World Bank Logistics Performance Index.
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 51
CRITICAL CONSTR AINTS
Figure 1.49: Cambodia’s LPI shows remarkable improvements from reforms
LPI Score
3
Timeliness Customs
2.5
Tracking & 2
Infrastructure
tracing
Logistics International
competence shipments
2014 2012
Source: World Bank Logistics Performance Index.
Further improvements are under way, and more can still be done. Over 120 laws, royal decrees,
75.
sub-decrees and regulations containing formal non-tariff measures (NTMs) have been identified,
covering various import and export-related permits, licenses and approvals needed to conduct trade.
These NTMs have contributed to the large number of informal payments or gifts given to public
officials in order to expedite processing of exports or imports. The 84 percent share of registered
enterprises reporting such informal payments or gifts is nearly double that of 2007 (Figure 1.50). Such
payments are often associated with high regulatory burdens on traders, while streamlining those
trading procedures could indirectly reduce informal costs in trading across borders (IFC, 2014).
Figure 1.50: Cambodia has the highest share of firms making informal payments or gift-giving to get import
licenses
Cambodia (2012)
Lao PDR (2009)
Bangladesh (2007)
Cambodia (2007)
Philippines (2009)
Indonesia (2009)
Vietnam (2009)
Sri Lanka (2011)
0% 25% 50% 75% 100%
Percent of enterprises that applied for import license
Source: World Bank Enterprise Surveys.
The Investment Climate Climate Assessment 2014
52 Creating Oppor tunity for Firms in Cambodia
CRITICAL CONSTR AINTS
For the issuance of CO, efforts are being made to automate as well as improve transparency
76.
through a Trade Information Website that will make all rules, regulations and fees available
online. A NSW system will also allow traders to meet all import and export requirements through an
online portal, which in turn will help ensure that data are only submitted once and that processing, risk
assessment and inspection activities are well coordinated.
Regulatory reforms are expected to help move Cambodia into the next stage of development.
77.
Cambodia’s export competitiveness has improved over time, but it remains concentrated in low
value-added garment and agricultural products due to relatively low wages and productivity. While the
country’s abundant low-skilled workforce has proven successful in driving growth, moving to the next
stage of development will involve efficiency-driven growth based on better product quality and value-
added production processes that are supported by well-functioning public institutions and an efficient
and streamlined regulatory framework (World Economic Forum, 2012). In this regard, the International
Monetary Fund (IMF, 2014) has recently highlighted the potential benefits to export growth and
diversification that are anticipated from the reform agenda being put forward by the MoC to reduce the
regulatory burden for businesses while improving governance and accountability of government
agencies to ease constraints on doing business.
B ased on the estimates of the production function (see Annex II), we simulate the impact
78.
of changes in the investment climate on productivity. In particular, we can consider how much
productivity changes if we move from a ‘bad’ investment climate (bottom 10 percentile of the distribution)
to a ‘good’ investment climate (top 90 percentile of the distribution). Table 1.1 shows how much of
the productivity change between the 10th and 90th percentile of the distribution could be achieved by
changes in the four investment climate variables that were found to be mostly significant and robust
across the different specifications: days to clear customs for imports, payments to deal with bureau-
cracy ‘faster’, loss from theft, robbery, vandalism or arson, and presence of a bank loan.11
The simulations show that firms that would move from a bad investment climate to a good
79.
investment climate would increase their value added by 37.5 percent with a reduction in the number
of days it takes to clear customs. If the improvement is in terms of a reduction of payments to deal
with bureaucracy faster, value added would increase by 20.5 percent. Improvements in access to loans
would have a productivity impact of 28.7 percent and a reduction in the loss from theft, robbery,
vandalism or arson would increase productivity by 3.5 percent.
Table 1.1: The importance of the investment climate for productivity
10th Percentile Median 90th Percentile % Change
value added*
Days to clear customs for imports 0 0 1.10 -37.5
(log(days+1))
Payments to deal with bureaucracy 0 0 1.79 -20.5
'faster' (log(percentage of sales+1))
Loss from theft, robbery, vandalism or 0 0 0.14 -3.5
arson (log(percentage of sales+1))
Firm has loan from bank/ financial 0 0 1 28.7
institution (dummy)
* The percentage change indicates how much value-added would change in response to a change in those variables from
the 10th to the 90th percentile.
11
We use the estimated coefficients of column (3) in Table 1 for the simulation.
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 53
CHAPTER
02 COPING WITH A DEMANDING
INVESTMENT CLIMATE
I- THE RISE OF SEZS
KEY MESSAGES
of 2013, 23 SEZs have been authorized. These are located throughout the country, with
 As
concentration in Phnom Penh, Sihanoukville and along the borders with Vietnam and Thailand.
 T
he 2012 Enterprise Survey for Cambodia is the first survey to include a special module on
SEZs, and it is the first in the country to sample firms located inside the SEZs.
 A
nalysis of the survey results provides no strong evidence that SEZ firms are significantly
outperforming those outside the SEZs despite their larger size and export orientation.
 I
t is not clear that SEZ firms are delivering substantial spillover benefits to the Cambodian
economy. While they do employ a higher skilled workforce and invest more in training than
firms outside the SEZs, only some companies expose their employees to leading international
technologies and practices.
 T
he survey evidence suggests that the zones are not making a significant difference in
improving the investment climate faced by investors, which may well explain why we observe
no major performance advantage in the SEZ-based firms. Firm perceptions indicate that
SEZ-based firms have a more negative view of the investment climate than firms based
outside the zones: almost no firm reported the investment climate being better in the
SEZs than outside them.
2.1 Introduction
SEZs are designed explicitly to overcome barriers to a poor investment climate in the wider
80.
domestic economy. By concentrating infrastructure investment and providing an improved business
set-up, operations, and trade facilitation environment, often in combination with attractive fiscal
incentives, some SEZ programs have been successful in attracting FDI, promoting diversified
exports, and generating large-scale employment (especially women). Evidence from around the
world suggests that two key criteria for determining success and sustainability of SEZ programs over
time are: (i) the degree to which the SEZs improve the competitiveness of firms operating in them
by addressing the real constraints facing investors (rather than relying on fiscal incentives); and
(ii) the degree to which they establish effective linkages with the domestic economy and facilitate
spillovers (technology, knowledge, policy reform) that raise the competitiveness of the wider
domestic economy. It should also be noted that, in the Cambodian context, the SEZs policy aims
at creating off-farm jobs, particularly in rural areas outside Phnom Penh, and to attract FDI in new
manufacturing sectors, in view of diversifying its export base, which is largely reliant on the garment
and foot-wear sectors.
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54 Creating Oppor tunity for Firms in Cambodia
COPING WITH A DEMANDING INVESTMENT CLIMATE
I- THE RISE OF SEZS
How successful have Cambodia’s SEZs been in establishing an environment that improves the
81.
competitiveness of its firms? And how have Cambodia’s zones performed against the SEZs
policy objectives? We find that Cambodia’s SEZs policy is showing initial signs of success in
terms of attracting investment in new sectors, including electronics and light industries. However,
SEZs appear to have only a marginal impact on the investment climate facing firms, and have not yet
created an environment that contributes to substantially improved firm performance and spillovers
to the domestic economy. In fact, while the zones offer several benefits in terms of One-Stop
Shops and enhanced border clearance procedures, investors continue to express disappointment
that their expectations for a benign investment environment inside the zones are not being fulfilled.
It is important that the revision of the current Investment Law is completed as soon as possible
82.
to modernize the existing regime. A system of smart incentives and more effective investment
protection can pave the way for foreign investors deciding to move into Cambodia, taking advantage
of its competitive labor cost and its favorable geographical location at the center of the ASEAN
Economic Community (AEC). The RGC could also consider designing and implementing a Zero-
Corruption Strategy to curb corruptive practices within the SEZs. Policing this strategy would be
feasible in the controlled environment of the SEZs, and have a strong resonance in terms of building
a positive image for Cambodia as an FDI destination.
2.2 SEZs in Cambodia
Cambodia launched SEZs in December 2005, with the establishment of the Cambodian Special
83.
Economic Zone Board (CSEZB).12 The zone program was intended to support investment attrac-
tion by streamlining administrative procedures and tapping the potential for private sector provision of
infrastructure and services. In addition, the zones were seen as a tool to establish economic linkages
between urban and rural areas, and particularly to promote investment outside Phnom Penh (World
Bank, 2011). All SEZs in Cambodia are developed and operated by the private sector.
While investors in the zones have access to a number of fiscal incentives, similar incentives are
84.
currently available to other ‘qualifying investment projects’ based outside the SEZs. This latter
policy may change as a result of a possible revision of the Investment Law. The main exception is for
zone development projects, where developers may obtain concessional access to land for SEZ
development in peripheral and border regions. In addition, zone investors have special suspension of
VAT on inputs of construction material and equipment and, more importantly, on inputs sourced from
other SEZ-based companies. Otherwise, the main advantages for investors looking to establish in the
zones are:
• L and access and infrastructure: The SEZs offer access to land and facilities with security of
tenure; scope and quality of industrial infrastructure varies across the zones, with some zones
offering substantial advantages in terms of access to cheap electricity imported from neighboring
countries (i.e. electricity imported from Vietnam in the Bavet SEZ, etc.).
• “One-stop” facilitation: The SEZs offer on-site facilitation of trade and administrative activities,
with government official stationed on site.
12
On 29, December 2005 through “Sub-Decree No. 147 on the Organization and Functioning of the CDC” and “Sub-Decree
No. 148 on the Establishment and Management of the Special Economic Zone”
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 55
COPING WITH A DEMANDING INVESTMENT CLIMATE
I- THE RISE OF SEZS
E xpedited customs: Special procedures are available to facilitate importing and exporting for
•
zones located within 20 km of borders; in all SEZs outbound customs clearance takes place
within the SEZ.
A s of 2013, 23 SEZs have been authorized. These are located throughout the country, with
85.
concentration in Phnom Penh, Sihanoukville and along the borders with Vietnam and Thailand
(see Annex III for a list of SEZs including some details on their location, size, status, and investors).
Of the 23 approved zones, eight appear to have commenced operations, with four zones having more
than three investors each, according to data from the CSEZB. These are Manhattan (18), Phnom Penh
(37); Sihanoukville (18); and Tai Seng Bavet (11). Investors operating in the zones cross a wide range of
activities, with the core in apparel, footwear, and electronics, but also including automotive, bicycles,
plastics, food, and packaging (Box 2.1).The nascent production diversification in Cambodia is largely
taking place within the SEZs, particularly in the light manufacturing sector. This marks a great
achievement of this policy which has succeeded in creating new jobs in areas where Cambodia can
further diversify its export base, if bottlenecks are addressed. Investment in the zones has increased
substantially since 2011, with the number of reported investors having more than doubled in less
than two years. Since fewer than 100 companies are currently operating in the SEZ (and only 32 took
part in the survey), it is too early to draw conclusion on the effectiveness of the SEZ policy. Nevertheless,
the findings of this survey could help policymakers to identify critical issues that would contribute to
the policy success, if prompt corrective measures are taken.
Box 2.1: SEZs and diversification in light manufacturing
About half of the companies located in SEZs produce light manufacturing exports. Another 19 per-
cent of companies produce garments and 8 percent produce footwear. The rest are either utilities or
companies providing a service or a good for the domestic market. The contribution of these SEZs to
Cambodia’s light manufacturing exports can be summarized as follows:
Five companies produce bikes from inside three different SEZs. Four of those companies are
•
located closed to the border with Vietnam.
Three companies (3 percent of all SEZ companies) in three different SEZs work on assembling
•
motorized vehicles, which was Cambodia’s largest light manufacturing export in 2011.
Thirteen percent of all SEZ companies, a majority of which located in Phnom Penh SEZs,
•
produce electronic and electrical exports. Sixty percent of these companies produce one of
Cambodia’s top electronic or electrical exports (wires, motors, circuits, tv components, line
telephony components).
Twenty five companies (28 percent of all SEZ companies) were involved in producing “other
•
light manufacturing”, including in sport equipment and toys, mattresses, nuts, screws and bolts,
machinery, and other type of light manufacturing.
To compare, there were 7 companies producing bicycles across Cambodia in 2011, 5 producing
motorized vehicles parts and components, 15 producing electronics and electrical goods, and 24
that could be classified under the “other light manufacturing” (minus furniture) category. This
suggests that SEZs represent a most of Cambodia’s total light manufacturing production. They are
also likely to produce a much larger and more valuable share of exports.
Source: CTIS 2013, RGC.
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56 Creating Oppor tunity for Firms in Cambodia
COPING WITH A DEMANDING INVESTMENT CLIMATE
I- THE RISE OF SEZS
2.3 Firm characteristics: inside versus outside the SEZs
The latest Enterprise Survey for Cambodia (2012) is the main data source for our analysis.
86.
The survey includes a special module on SEZs, and it is the first in the country to sample firms located
inside the SEZs. Thirty-two firms established inside SEZs replied to the survey questionnaire in
addition to 830 firms located outside the zones. Because the Enterprise Survey includes some types
of firms that are not strictly comparable to firms inside SEZs (e.g. firms from the services sectors,
informal firms, etc), a selected sample of the survey was chosen to serve as a comparison group.
To do this, we restricted the sample of firms from the wider economy (“non-SEZ firms”) to medium
and large manufacturing firms excluding the agro-processing sector.13 Regressions have been made
controlling for differences in firm characteristics between SEZ and non-SEZ firms to verify
whether significant differences occurred also after controlling for sector (particularly garments),
ownership, and size (large firms versus medium firms). Bold underlined numbers in the tables indicate
that the difference in responses between SEZ and non-SEZ firms are significantly different from
each other at 10 percent after controlling for sector (specifically garment versus non-garment), size
(medium versus large) and ownership (percent foreign).
Some differences in the profile of firms inside and outside the zones remain even after restricting
87.
our non-SEZ sample. These differences may affect the findings in subsequent sections, as they will
shape the actual and perceived constraints faced by different investors, as well as the potential actions
that they could undertake to overcome obstacles in the business environment. These differences are
summarized below:
Age: Firms established inside SEZs are relatively new compared with firms in the main

economy (2.3 versus 3.2 years, respectivly). This result is to be expected, given that the SEZ
program was only established in 2005.
Size: The average firm in the SEZs is larger in terms of employees (430 vs. 616) than the

average firms outside the zones. In particular, firms located inside the Manhattan SEZ are twice as
large in terms of employment. However, firms outside the SEZs are on average larger than those
inside the SEZs (US$8,691 vs. US$9,693), with the significant exception of the firms in Manhattan
SEZ which have annual average sales of US$16,000.
wnership: Although FDI participation is high in Cambodia, there are still differences in its
 O
prevalence inside and outside the zones. Foreign control, defined as a foreign equity
participation in a firm higher than 50 percent, is almost universal inside the zones (93.8 percent of
firms) but less prevalent outside them (53.8 percent of firms).
Market orientation: The domestic market is a more important source of revenue for non-SEZ

firms than for firms inside the zones. On average, firms outside the zones sell three-quarters of their
output in the domestic market while SEZ firms sell about one third of their products inside
Cambodia.
With the exception of one firm, all SEZ firms are classified as medium or large enterprises in the manufacturing sector and none
13
is involved in agro-processing. For more details about the sample selection and firm characteristics see Annex 2.
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 57
COPING WITH A DEMANDING INVESTMENT CLIMATE
I- THE RISE OF SEZS
Table 2.1: Key differences between SEZ and non-SEZ firms
non-SEZ SEZ MA SV PP
Avg. age (years) 13.2 2.3 4.0 1.5 2.5
Number of employees 430 616 1245 213 431
Avg. sales (US$ thou.) 9,693 8,691 16,000 3,131 4,334
Export intensity (% sales) 25.5 70.3 100 56.3 54.5
Foreign controlled (% ownership) 38.4 93.8 100 87.5 100
MA= Manhattan; SV= Sihanoukville; PP= Phnom Penh
Note: Number of responses for other SEZs considered too low to present individually; however the data from all SEZ-
based firms that responded is included in the aggregate SEZ figure. For details on response rates across SEZs, please
see Annex IV. Bold underlined numbers indicate that the difference in responses between SEZ and non-SEZ firms
are significantly different from each other at 10percent after controlling for sector (specifically garment versus non-
garment), size (medium versus large) and ownership (percent foreign).
Source: World Bank Enterprise Survey, 2012.
2.4 SEZs and the investment climate
Overall assessment
One of principle objectives of SEZs as an instrument is to help overcome many of the obstacles
88.
faced by firms in the wider economy. While this has been the case in many SEZs around the world,
it is by no means the rule. In many zones, it turns out that the investment climate offers no significant
advantages to firms (Farole, 2011). Table 2.2 and Figure 2.1 summarize the main constraints perceived
by businesses operating in Cambodia. Table 2.2 shows the percentage of firms rating each constraint
as “major” or “very severe”, while Figure 2.2 prioritizes these constraints. It shows the share of Cambodian
firms that have identified each constraint as being among their top three obstacles to operation.
Table 2.2: Percentage of firms ranking constraint as “major” or “very severe”
non-SEZ SEZ MA SV PP
Corruption 38.1 74.2 83.3 62.5 81.8
Skills & education of available workers 36.7 71.9 57.1 75.0 72.7
Macroeconomic instability (inflation…) 40.4 43.8 57.1 50.0 36.4
Electricity 39.8 40.6 71.4 25.0 27.3
Economic & regulatory policy 14.5 34.4 42.9 12.5 45.5
uncertainty
Tax administration 15.2 33.3 66.7 20.0 27.3
Transportation 16.8 28.1 42.9 37.5 18.2
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58 Creating Oppor tunity for Firms in Cambodia
COPING WITH A DEMANDING INVESTMENT CLIMATE
I- THE RISE OF SEZS
non-SEZ SEZ MA SV PP
Customs and trade regulations 10.9 28.1 14.3 25.0 45.5
Access to land 11.6 17.9 14.3 25.0 18.2
Legal system/conflict resolution 14.0 16.0 16.7 33.3 18.2
Anti-competitive or informal practices 21.4 15.6 0.0 0.0 36.4
Telecommunications 9.9 15.6 0.0 25.0 18.2
Business licensing and operating 8.8 15.6 14.3 0.0 27.3
permits
Labor regulations 6.6 12.5 0.0 0.0 9.1
Water 14.1 12.5 28.6 12.5 9.1
Crime, theft and safety 8.1 12.5 14.3 12.5 18.2
Access to financing (e.g. collateral) 11.6 9.7 14.3 12.5 10.0
Tax rates 20.1 9.4 14.3 12.5 9.1
Cost of financing (e.g. interest rates) 20.2 3.2 0.0 0.0 10.0
Note: : Figures highlighted in red are outliers, either in SEZs as a whole versus non-SEZs or within the SEZ sample. Bold
underlined numbers indicate that the difference in responses between SEZ and non-SEZ firms are significantly differ-
ent from each other at 10percent after controlling for sector (specifically garment versus non-garment), size (medium
versus large) and ownership (percent foreign).
Source: World Bank Enterprise Survey, 2012.
Several findings emerge from the data. Most importantly, firms inside and outside the SEZs
89.
rank the same four issues as the most important constraints to business: electricity; corruption;
macroeconomic instability; and skills and education of available workers. For the SEZ-based
firms, corruption and workers skills stand out as being by far the biggest factors of concern, identified
as an important obstacle by more than 70 percent of firms (roughly double than non-SEZ firms). This
high rate could be explained also on the base of unmet expectations by foreign investors who could
have expected to face fewer issues in these areas, as a result of their decision to invest within an SEZ.
After this group of four obstacles, there is significant drop in the percentage of firms that identify other
issues as relevant, particularly for firms based outside the SEZs. For instance, no other issue was
identified as a top 3 obstacle by more than a quarter of firms outside the zones, and only two issues
were highlighted as top 3 obstacle by more than a third of firms inside the zones—economic and
regulatory policy uncertainty (34 percent) and tax administration (33 percent). This drop is less sharp
in SEZ firms (indeed, SEZ firms as a whole appear to be more negative in their perceptions of the invest-
ment climate), among which a group of issues—customs and trade regulations, and transportation—are
still relevant for between one quarter and one third of firms. These issues, although not particularly high
in the list of non SEZ-based firms, are important for SEZ firms mainly due to the higher prevalence of
exporting firms within the zones.
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Creating Oppor tunity for Firms in Cambodia 59
COPING WITH A DEMANDING INVESTMENT CLIMATE
I- THE RISE OF SEZS
Figure 2.1: Percentage of firms ranking constraint as their top 3 obstacles
Electricity
Macroeconomic instability (inﬂation…)
*
Skills & education of available workers *
Tax rates
*
Corruption
Anti - competitive or informal practices
*
Cost of ﬁnancing (e.g. interest rates)
Transportation
Economic & regulatory policy uncertainty
Legal system/conﬂict resolution
Crime, theft and disorder
Labor regulations
Telecommunications
Access to ﬁnancing (e.g. collateral)
Access to land
Customs and trade regulations *
Business licensing and operating permits
Tax administration
0 10 20 30 40 50 60 70
SEZ non -SEZ
Note: Stars indicate that the difference in responses between SEZ and non-SEZ firms are significantly different from
each other at 10percent after controlling for sector (specifically garment versus non-garment), size (medium versus
large) and ownership (percent foreign).
Source: World Bank Enterprise Survey, 2012.
The fact that the same four issues are identified as the biggest constraints for firms both inside
90.
and outside the zones suggests that the SEZs cannot yet claim to have addressed effectively
the biggest challenges in Cambodia’s investment climate. On the other hand, for at least two of these
issues, it is difficult to imagine the SEZs could substantially alter the investment climate deficiencies.
Macroeconomic instability is clearly outside the scope of the SEZs. Skills and education of workers
is mainly an economy wide issue. In the case of corruption, while it is also an economy wide problem,
it should certainly be possible to reduce substantially its impacts on business, through an SEZ
environment with its own customs and administrative regime. Indeed, many zones around the world
have managed to achieve this. Finally, the concern over electricity, to the degree it is a valid one
(see below) is one that should clearly be addressed within an SEZ environment.
2.5 Productivity performance of firms in SEZs
If SEZs are successful in establishing a more competitive environment in which firms can
91.
operate this should be reflected in the performance of firms established inside the zones relative
to the firms outside. This section compares the performance of SEZ and non-SEZ firms using different
measures of productivity in order to assess whether the former perform better than the latter.14
14
Another measure of firm performance would be growth (output, exports, employment). However, as this is the first time the SEZ
firms have been surveyed, no panel data is available for this set of firms. Moreover, the majority of SEZ-based firms have been in
operation for less than 4 years.
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60 Creating Oppor tunity for Firms in Cambodia
COPING WITH A DEMANDING INVESTMENT CLIMATE
I- THE RISE OF SEZS
Analysis of the survey results presented in 2.2 provides no strong evidence that SEZ firms are
92.
out performing significantly those outside the zones despite, as noted previously, their larger
size and export orientation. Where SEZ-based firms do have an advantage is in labor productivity,
measured as value-added per worker.15 Here, productivity for SEZ-based firms (US$4,948) is about
20 percent higher than for firms based outside the SEZs (US$4,117). However, unit labor costs are
actually slightly higher (0.42 in the SEZs versus 0.40 outside). This seems to be explained mainly by
higher labor costs in the SEZs, at US$1,502 per worker, on average, in the SEZs versus US$1,284
outside the zones (a difference of 58 percent), which in turn may be a function of differences in the
skills profile of employment (see later discussion).16 It also indicates that value-added per unit of
output may be moderately higher in the SEZs.
Given that labor productivity depends also on capital available, a broader measure of productivity
93.
is TFP. This is an indicator of productivity that takes into account both labor and capital used in
the production process. According to our estimates, average TFP of SEZ and non-SEZ firms is virtually
the same. Further, no significant difference can be found in the capacity utilization of firms inside and
outside SEZs. The gap in comparative performance reported labor productivity and the TFP estimates
is explained by the SEZ-based firms being more capitalized—i.e. having higher levels of investment.
This is to be expected given the high FDI ownership in the SEZs (FDI-owned firms around the world
tend to be more capital intensive than their domestic counterparts). The low average age of SEZ-
based firms may also contribute to the gap in capital employed, as these firms will have invested
much more recently, while older, domestic firms may have already depreciated substantially the
investments in their equipment and facilities.
Table 2.3: Performance comparison: SEZ and non-SEZ firms17
non-SEZ SEZ
Labor productivity (value added / worker) 4,117 4,948
Unit labor costs 0.40 0.42
TFP 5.5 5.0
Capacity utilization (%) 74.5 71.0
Note: Bold underlined numbers indicate that the difference in responses between SEZ and non-SEZ firms are
significantly different from each other at 10percent after controlling for sector (specifically garment versus non-
garment), size (medium versus large) and ownership (percent foreign).
Source: World Bank Enterprise Survey, 2012.
15
The following cleaning rules have been applied when calculating the labor productivity numbers. First, all firms with negative
value added are omitted. Second, all firms with a share of intermediates in output less than 0.1 or more than 1 are omitted, where
intermediates are the sum of the costs of raw material, electricity, fuel, communication, and other production costs (excluding
cost of labor, investment, depreciation, interest payment, and taxes). Third, if the intermediates share in output deviates more than
three standard deviations from the industry-mean (after applying the first two cleaning rules), then the observation is omitted as
an outlier. Fourth, the bottom or top five percent of the (weighted) labor productivity distribution for each industry is eliminated.
16
Median labor costs are also higher in SEZ locations: US$1,320 versus US$1,111.
The sample size for this table is SEZ=19 / non-SEZ=155. We drop firms without sufficient information to calculate all of the
17
indicators in the table. We also drop outliers. Specifically, there were a number of outliers (particularly in the SEZ sample) where
reported labor costs were substantially higher than value added (in some cases by a factor of 10).
For additional details on channels and determinants of linkages see Farole, Staritz and Winkler (2013)
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2.6 SEZ firms and local economy linkages and spillovers
While FDI delivers a number of important contributions to host economies in terms of
94.
investment, employment, and foreign exchange, perhaps its most important role from the
perspective of long-term growth and development, is as a source of knowledge, technology,
and know-how that can contribute to upgrading the domestic economy. These so-called “spillovers”
usually refer to the productivity gains that result from the diffusion of knowledge and technology
from foreign investors to local firms and workers, and typically occur through one or more of the following
channels:18 (i) supply chain linkages (where foreign investors sell to local firms or, most importantly,
purchase goods and services inputs from local firms); (ii) labor markets (when skilled workers from
the foreign-owned firms take their knowledge with them to domestic firms or to starting new
entrepreneurial ventures); and, (iii) changing market forces (when increased competition, collaboration,
or demonstration resulting from FDI into the country leads to knowledge diffusion).
As one of the most important instruments for attracting FDI into Cambodia and ensuring the
95.
success and sustainability of these investors, SEZs are critical in determining the degree
to which spillover potential is realized. The location of the zones, their sectoral focus, the nature
of firms that are attracted into the zones, their policy and regulatory environment, and day-to-day
operational and logistical issues in the zones all play a part in determining the scope and breadth of
linkages that are likely to be established between SEZ-based investors and the local firms, workers,
and institutions. The more established and deeper are the linkages, the more likely it is that meaningful
spillovers will take place. The very nature of SEZs, as distinct enclaves outside of the domestic
economy, means that policy and regulatory factors often act as barriers to effective linkages. This is
particularly true of traditional export processing zones, whose primary value proposition is to facilitate
export-oriented production based on imported inputs.
96.
In the next section, we use the results of the enterprise surveys to look for evidence showing the
degree to which SEZ-based investors are: (i) linked with the domestic economy; and (ii) engaged in
activities that may lead to spillovers to domestic actors (firms and workers).
2.7 Spillover potential of SEZ-based firms
The concept of positive spillovers accruing through FDI is based on the premise that foreign
97.
investors will, on the whole, have a productivity advantage over domestic firms (given that the most
productive firms of any economy tend to be the ones that compete in external markets through
exporting and investing), and that they are more likely to have exposure to leading international
technology and knowledge. As discussed previously, we find limited evidence that SEZ-based firms
in Cambodia have a significant productivity advantage relative to similar firms based outside the zones.
However, there may be explanations for this quite apart from knowledge, technology, and technical
efficiency of firms—for example, the much more recent profile of investments from SEZ-based firms.
T herefore, we assess here the degree to which SEZ-based firms may have knowledge,
98.
technology, and practices that are more advanced than similar firms based outside the
zones. This would suggest potential for spillovers to benefit the domestic economy. Figure 2.2
shows that SEZ-based firms are much more likely than firms based outside the zones to be using
18
For additional details on channels and determinants of linkages see Farole, Staritz and Winkler (2013)
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technology licensed from a foreign company and to obtain and internationally-recognized quality
certification, such as ISO or industry-specific schemes. This is not surprising, given the strong
bias towards foreign ownership in the SEZs. In this context, however, it is perhaps surprising that
the figures are so low for the SEZ-based firms, with only a small minority having international
quality certification or licensing foreign technology. Significant variation existed in the responses
across zones, with a clear majority of firms in Manhattan licensing technology and investing in
certification, while almost none in Sihanoukville made such investments.
Figure 2.2: International technology licensing and quality certification
Share of ﬁrms using technology licensed from a foreign-owned company?19
100
80 71
60 50
40
40
14 13
20
0
non- SEZ SEZ MA SV PP
Share of ﬁrms having an internationally-recognized quality certiﬁcation?
100
80
57
60
40
25
20 13
8
0
0
non-SEZ SEZ MA SV PP
Source: World Bank Enterprise Survey, 2012.
19
Excluding office software
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Figure 2.3 shows that SEZ-based firms have actually invested less than non-SEZ firms in R&D
99.
as well as in product, process, and managerial innovations. Such investments appear to be particu-
larly rare in Manhattan and Sihanoukville, but much more prominent in Phnom Penh. While this could
be interpreted negatively that the SEZ-based firms have rather limited focus on innovation (and,
therefore, possibly limited potential for spillovers), it may simply be a reflection that most of the firms
in the SEZs are very newly-established, and so product and process upgrading has not yet been
required. In fact, the share of non-SEZ firms investing in innovation and R&D appears to be quite high,
so a positive reading of the results of Figure 2.3. could argue that newly-established foreign firms
have facilitated an environment (through competition and demonstration effects, as well as potentially
through linkages), which stimulates upgrading in domestic firms.
Figure 2.3: Innovation and R&D
Product and process innovation: composite score20
100
85 86
82
80
66
60
38
40
20
0
non- SEZ SEZ MA SV PP
Share of ﬁrms investing in formal R&D activities in previous three years
100 91
80
60 57
42
40
20 13
0
0
non- SEZ SEZ MA SV PP
Source: World Bank Enterprise Survey, 2012.
20
omposite score is the average share of firms that, in the previous three years, introduced at least one of the following: new
C
products or services (Q18), new or significantly improved methods of manufacturing products or offering services (Q20); new or
significantly improved logistical or business support processes (Q21); new or significantly improved organizational structures or
management practices (Q22); new or significantly improved marketing methods (Q23).
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2.8 Evidence of input-output linkages
Given this context on the potential for the mainly foreign firms based in the SEZs to contribute
100.
productivity-enhancing technology and know-how to the Cambodian economy, a key issue is
the degree to which these firms have established supply chain links with domestic firms, as this
is normally the most important channel for the realization of spillovers. In terms of input
(backward) linkages, Figure 2.4 . shows that SEZ firms source a very limited share of inputs from
the Cambodian economy, and it highlights dramatic differences between SEZ and non-SEZ based
firms. SEZ-based firms report, on average, sourcing only 12 percent of inputs from the domestic
economy, only one-fifth the level sourced locally by firms based outside the SEZs. We can see from
the distribution of sourcing patterns, that two-thirds of SEZ-based firms report sourcing no material
inputs domestically, while only 7 percent report sourcing more than half of inputs locally. This
is in dramatic contrast to non-SEZ based firms, where 59 percent of firms source all inputs
domestically. Patterns across the three main SEZs do not differ dramatically, although firms in
Sihanoukville are more likely to report sourcing fully from imports, which is perhaps unsurprising given
its port location.
It should be noted that while this share of local sourcing from SEZ-based firms in Cambodia
101.
does appear low. It is common globally that export-oriented manufacturing firms, particularly those
in sectors like apparel, footwear, and electronics, import the large majority of inputs. This is more
often the case in relatively small countries with limited domestic supply capacity, as is still the case in
Cambodia.
On average, just over one-third of the output of SEZ based firms is sold on the Cambodian
102.
market compared with just over half of non-SEZ based firms. The distribution of average firm
output destinations suggests that for the most part firms are either oriented domestically or to export
markets, with few firms selling to both markets (a pattern which, in itself, limits spillover possibilities).
In this case, there also appear to be significant differences across the main SEZs. All surveyed firms
in the Manhattan border SEZ are fully export oriented. By contrast, half of firms in Sihanoukville report
selling all output in the domestic market, and two-thirds sell at least 50 percent domestically (Figure
2.4). This suggests Sihanoukville is functioning primarily as an import-facilitating zone rather than an
export-promoting one.
Figure 2.4: Input linkages – percentage of material inputs purchased from domestic sources
Mean share of inputs purchased domestically
70
62
60
50
40
30
20 17 17
12
10 8
0
non-SEZ SEZ MA SV PP
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Share of ﬁrms purchasing broad shares of inputs domestically (%;1-49%; 50-99%; 100%)
100% 4
7 17 18
80% 40
21
59 27
60%
40% 3 83
8 68
60 55
20%
30
0%
non-SEZ SEZ MA SV PP
0 1-49 50-99 100
Source: World Bank Enterprise Survey, 2012.
Figure 2.5: Output linkages – % of outputs sold domestically
Mean share of outputs sold domestically
70
63
60
50 44
40 36
30 27
20
10
0
0
non-SEZ SEZ MA SV PP
Percentage of ﬁrms selling broad shares of outputs domestically (%; 1-49%; 50-99%; 100%)
100%
25
80% 38 36
62 3
60%
13
100
40%
2 72 64
20% 50
36
0%
non-SEZ SEZ MA SV PP
0 1-49 50-99 100
Source: World Bank Enterprise Survey, 2012.
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2.8.1 Labor market spillovers
Finally, we look at the potential that positive spillovers from SEZ-based firms can occur through
103.
domestic labor markets. First, Figure 2.6 presents a comparison of wage levels inside and outside
the SEZs. While wages are not actually associated directly with knowledge and technology spillovers,
they are an important indicator of the broader impact that SEZ-based firms are having on the domestic
economy.
The results indicate that wage levels of unskilled production workers are slightly lower in the
104.
SEZs than outside them. The difference is around US$10 lower at the base level, dropping to US$5
once benefits are taken into account, though these results are based on a small sample taken before
the recent increase in the minimum wage. This gap is relatively moderate, although it goes against
the trend seen in most SEZs worldwide, where wage rates, particularly inclusive of benefits, are
often higher inside the zones. One of the explanatory factors may be the geographical location of
Manhattan and Sihanoukville SEZs (salaries might be lower because of less dynamic job-market
outside Phnom Penh) or the low level of unionization in Cambodia’s SEZs. While firms in the non-SEZ
sample indicated 21.5 percent of their labor force was unionized, the corresponding figure inside
the zones was less than 8 percent. This was driven by no reported unionization in most of the zones,
while in Phnom Penh SEZ, 21.5 percent of the labor force was estimated to be unionized—a figure
somewhat below the 29.5 percent reported in Phnom Penh outside the zones.
Figure 2.6: Average monthly wage (US$) of an unskilled production worker
120
100 105
100 99 99 101
80
78 81
(US$)
60 68
61 59
40
20
0
non-SEZ SEZ MA SV PP
monthly wages excl beneﬁts (US$) monthly wages incl beneﬁts (US$)
Source: World Bank Enterprise Survey, 2012.
Wages aside, however, the zones do appear to have certain conditions in place to facilitate
105.
spillovers (Figure 2.7). First, the skills profile demanded by SEZ-based firms appears to be significantly
higher than for firms based outside of the zones, which raises the potential for higher level technologies
and processes to be deployed and for learning to be absorbed. Sixty-seven percent of permanent
employees in SEZ firms are reported to have secondary or tertiary education compared with only 54
percent in non SEZ-based firms. This pattern varies dramatically across locations, with 85 percent
of staff in Phnom Penh zone having at least secondary education (and 31 percent with tertiary or
vocational education) compared with 71 percent in Sihanoukville and only 43 percent in Manhattan.
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This is most likely a function of the availability of skilled workers in these locations. It is worth noting
that, even controlling for city of the location, the SEZs appear to demand higher-skilled workers. For
example, in Phnom Penh the share of workers with at least secondary education is 60 percent
outside the zones versus 85 percent inside; and in Sihanoukville it is 32 percent versus 74 percent.
In addition, firms based in the zones appear to be significantly more likely to invest in training
106.
of their workers, which again would contribute to higher absorptive capacity. On average, survey
results indicate 79 percent of production workers in the SEZ-based firms participate in formal training
programs, compared with 56 percent of firms based outside the zones. For non-production workers
the difference was much starker—36 percent in the SEZs versus only 9 percent outside of them.
Figure 2.7: Skills and training
Average education levels of permanent employees
100% 3
10 7
90% 15
80% 31
40
70%
44
60% 52 67
50%
40% 54
30% 56
20% 46
33
10% 26
16
0%
non-SEZ SEZ MA SV PP
Primary or less Secondary Tertiary or vocational
Percentage of full-time production and non-production workers trained
100
90 88
79
80 73 75
70 63
59
60 56
50
40 36
30
20
9
10 3
0
non-SEZ SEZ MA SV PP
Source: World Bank Enterprise Survey, 2012.
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Box 2.2: Do SEZs make a difference? Perceptions of investment at the local level
This section of the report provides evidence that some indicators of the business environment are
slightly better inside the zones than outside. However, the scale of these benefits appears to be
limited, and the evidence raises questions as to whether SEZs have succeeded in making a signif-
icant enough difference in the business environment to increase the competitiveness of the firms
established inside them.
This is also reflected also in firms’ own perceptions of the degree to which the location / zone in
which they are based offers an advantage relative to the country overall for various investment
location determinants. The table below suggests that, for the most part, investors do not perceive
the zones in which they are based are providing an improved business environment. In Manhattan
(MA) and Sihanoukville (SV), virtually all SEZ-based firms rated the environment in the zone as
comparable to in the country overall across almost all categories. In Phnom Penh (PP), the results
were much more diversified. A larger share of firms actually perceived the investment climate in the
Phnom Penh SEZ as worse than outside it across most categories, with some exceptions (access
to low cost labor was rated as more positive inside the SEZ; the business regulatory environment,
tax, duties and rules of origin were seen as the same inside and outside by almost all respondents).
Table 2.4: Percentage of firms that rate the business environment in the SEZ as better than the business
environment in the country overall
MA SV PP
Better Same Worse Better Same Worse Better Same Worse
Access to local and regional 0 100 0 0 100 0 9 36 55
markets
Access to transport 0 100 0 0 100 0 9 36 55
infrastructure
Access to low costs of labor 0 100 0 0 100 0 36 36 27
Access to highly skilled labor 0 100 0 13 88 0 9 27 64
Access to suppliers 0 100 0 0 100 0 18 45 36
Access to technology 0 100 0 0 100 0 9 27 64
Availability and costs of 0 100 0 0 100 0 27 18 55
land and buildings
Cost and quality of utilities 0 86 14 0 100 0 18 45 36
Corporate taxes and fees 0 100 0 0 100 0 0 55 45
Tariffs, duties, rules of origin 0 100 0 0 100 0 18 64 18
Business regulatory 0 100 0 13 88 0 9 82 9
environment
Note: respondents were asked to rate separately the business environment in the SEZ and in the country
(outside the SEZ) along each of the dimensions presented in this table on a scale of 1 (poor) to 5 (excellent).
This table presents the share of firms whose responses showed higher ratings for the SEZ versus the country.
Figures are weighted
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Interestingly, other investment climate constraints that typically motivate the need for SEZs—
107.
customs, tax administration, access to land, water, telecommunications—are not identified as
major constraints by firms based outside the zones, and in many cases are actually perceived
as bigger problems for firms based inside the zones. The three issues that stand out clearly as
being less of a constraint for firms inside the SEZs are: (i) cost of financing; (ii) anti-competitive or
informal practices; and (iii) tax rates. The first two of these are clearly a function of firm characteristics,
with firms outside the zones being smaller and domestically-owned (thus more likely to face greater
problems accessing capital), as well as more focused on selling to domestic markets (thus more likely
to compete with informal firms). Tax rates are therefore, the only significant factor where the SEZs ap-
pear to make a major difference in the perceptions of the investment climate. An explanation for this
could be the ability for non-SEZ firms to negotiate informal arrangement with the Tax Department as
compared with the higher formality in tax administration which characterizes SEZ firms.
But firms’ perceptions of constraints are not always the most accurate indicator of reality.
108.
This is particularly true when comparing across sets of firms with significantly different character-
istics and contexts. This may well be the case in the comparison of SEZ and non-SEZ based firms
in Cambodia. Firms based in the SEZs may have much higher expectations of the investment climate,
based on experiences in other countries or on the promise of the SEZs. Similarly, the fact that some
typical constraints (for example tax rates and access to utilities) are not an issue for SEZ-based
firms may lead to increased concerns over those factors that do remain.
109.
In the remainder of this section, we focus on four issues—labor skills and education, electricity,
corruption, and customs21 —and probe more deeply the degree to which SEZs in Cambodia alleviate the
burdens of the most important business climate constraints. In doing so, we attempt to use, wherever
possible, survey data that go beyond simply perceptions of constraints.
2.8.2 Labor skills
More than one third of SEZ firms identify labor skills as the single most important obstacle in
110.
the business environment and more than two-thirds rank it as one of their top three most
important issues. Even though labor skills are also one of the most important issues for non-SEZ firms,
a significantly lower percentage of firms identify them as the most important obstacle (14 percent)
or among their top three constraints (36.7 percent). Even comparing within the same cities, like
Phnom Penh and Sihanoukville, SEZ-based firms tend to rank labor skills as a more severe constraint
than firms outside the zones.
What can be driving the different views on the importance of insufficient labor skills as a
111.
business constraint in Cambodia? One explanation may be the different employee profiles that SEZ
and non-SEZ firms demand. Figure 2.8 shows that unskilled workers represent about the same share
of the workforce in SEZ and non-SEZ firms (40 and 39 percent, respectively). This difference is more
acute when comparing SEZ versus non-SEZ firms in core locations like Phnom Penh (45 percent of
workers unskilled outside the SEZs versus only 34 percent in the SEZs) and Sihanoukville (59 percent
versus 35.5 percent).
SEZ firms are seeking to hire skilled workers at wages similar to or even lower than in the rest
112.
of the economy. In addition, the fact that SEZ firms are seeking to hire a more skilled labor force with
wages that are similar or even lower than those offered in the rest of the economy could be one of the
reasons why the lack of available skilled labor is perceived as more problematic for them (Figure 2.8).
21
ne of the issues identified among the top four constraints, macroeconomic instability, is not dealt with in this section as both
O
firms inside and outside SEZs face the same macroeconomic environment. Although ‘customs and trade regulations’ are included
among the top four most important business constraints, it is included in the discussion because its importance for exporting firms
who represent a significant percentage of firms inside SEZs.
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Figure 2.8: Composition of firms’ workforce
100% 4 1
7 5
90% 10 6 11 18
9
80%
11
70%
46 46
60% 43 52
50% 37
40%
30%
20% 39 40 42
35 34
10%
0%
non-SEZ SEZ MA SV PP
Unskilled Skilled Prof. & Mgmt. Non-prod. & service
100% 0 1
4
90% 9 18 9 11
80%
11 32
70%
42
60% 52
50% 37
40%
30% 59
20% 45
34 35
10%
0%
PP PP SEZ SV SV SEZ
Unskilled Skilled Prof. & Mgmt. Non-prod. & service
Note: SV has only three observations.
Source: World Bank Enterprise Survey, 2012
2.8.3 Electricity
Twenty-eight percent of SEZ-based firms rank electricity as the single biggest constraint in the
113.
business environment; the highest total behind labor skills and slightly higher than the share
of non-SEZ-based firms that identify electricity as the biggest constraint. Overall, about half
the firms both inside and outside SEZ rank electricity as a top three concern (39.8 percent and
40.6 percent, respectively). In reality, our results show that there is not a lot of difference between SEZ
and non-SEZ firms in terms of electricity environment they face, and that, if anything, the environ-
ment in the zones is slightly better. Table 2.5 illustrates that SEZs are somewhat worse off in terms
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of the percentage of firms affected by outages and the losses estimated to have been incurred by
outages (although this may be impacted by the relative scale and nature of production in SEZ firms)
compared with non-SEZ firms, but perform slightly better in terms of average duration of outages.
The number of outages per month experienced in Manhattan SEZ is exceptionally high (more than 143),
compared with the experience of firms in other SEZs (less than 4 in Sihanoukville and between 2 and 3
in Phnom Penh) and outside the SEZ (less than 10).
One area where zones seem to offer an advantage compared with the domestic economy is in
114.
the price of electricity which is considerably cheaper inside the zones (Riels867 vs. Riels1,330
per kw/hr). This, however, is explained fully by the much lower costs of electricity in the Manhattan
zone, where rates are less than half the average for non-SEZ-based firms. In fact, the estimated
electricity costs in Sihanoukville, at Riels1,100, are not far to the non-SEZ average, while in Phnom Penh
SEZ, they are below non-SEZ average (Riels928) (Table 2.5). It is worth noting that while Manhattan
SEZ, which is close to the border and benefits from a connection to the Vietnamese grid, offers the
cheapest energy among the zones, it also exhibits a very high number of episodes and hours lost to
power outages. Manhattan SEZ is one of the locations in the country with the highest share
of firms (85.7 percent) identifying electricity as among the three biggest constraints.
Table 2.5: Indicators of electricity infrastructure quality and price
non-SEZ SEZ Manhattan Sihanouk- Phnom
(SEZ) ville (SEZ) Penh (SEZ)
% firms experiences outages 81 87 100 75 80
Avg. number of outages per month 9.5 42.7 143.7 3.8 2.6
Avg. duration of outages (hours) 1.5 1.4 2.4 1.2 0.9
Losses incurred by outages (% sales) 1.6 3.6 2.7 4.3 0.4
Price (per kw/hr) 1,330 867 519 1,100 928
Source: World Bank Enterprise Survey, 2012.
2.8.4 Corruption
Corruption is identified by about three-quarters of SEZ firms as one their top three constraints.
115.
In all zones with the exception of Phnom Penh, all firms interviewed declared that gifts or informal
payments are required frequently, most of the time, or always when dealing with authorities. A
significantly lower percentage of non-SEZ firms (38 percent) identified corruption among the top
three obstacles in the business environment, which seems to be supported as well by a much lower
share of non-SEZ-based firms (42.7 percent) reporting that gifts or informal payments are required
frequently, most of the time, or always when dealing with authorities.
2.8.5 Customs and trade regulations
Customs and trade regulations are identified as one of the top three business obstacles by
116.
28 percent of SEZ-based firms, compared with only 11 percent of non-SEZ firms. While this
difference is substantial it is not unexpected, given the significantly greater reliance in SEZ firms on
both exporting and importing.
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Figure 2.9: Time (days) to clear goods through customs
5.0 4.7
4.5
4.0
*
3.5
3.0 3.0 * 3.0
3.0 2.6 2.7
2.4
(days)
2.3
2.5
*
2.0 1.6
1.5 1.2
1.0
0.5
0.0
non-SEZ SEZ MA SV PP
exports imports
Note: Stars indicate that the differences in firm responses across the different SEZ locations are significantly different
from each other at 10 percent after controlling for sector (specifically garment versus non-garment), size (medium
versus large) and ownership (percent foreign).
Source: World Bank Enterprise Survey, 2012.
2.9 Conclusions
Cambodia’s Special Economic Zones have expanded rapidly since they were first introduced at
117.
the end of 2005. The Government’s strong support of the program, along with the openness to pri-
vate sector development and operation, has contributed to the establishment of 23 zones around the
country. While many of these zones are still in the early planning stages, several have been successful
in attracting foreign investors across a wide range of manufacturing sectors. Growth in investment
in the zones has been particularly rapid since 2011 with significant diversification taking place
particularly in the light manufacturing sector. This element alone marks an early success of this
policy, as Cambodia needs to attract FDI to differentiate its export base and create job opportunities
in sectors others than garments and footwear. By creating conditions for the establishment of light
industry, Cambodia can tap into opportunities offered by regional integration, linking up to regional
supply chains particularly in parts and components manufacturing.
This note identifies some issues that deserve urgent attention to ensure SEZs’ effectiveness,
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both in their ability to deliver a more competitive environment for investors and in their potential
to deliver substantial benefits to the Cambodian economy. First, while firms in the SEZs have
characteristics that tend to be associated with high productivity—large size, export orientation, and
foreign ownership—they do not appear to outperform non SEZ-based firms substantially.
Second, it is not clear that the SEZ firms are yet delivering substantial spillover benefits to the
119.
Cambodian economy. While they do employ a higher skilled workforce and invest more in training
than firms outside the SEZs, only some companies expose their employees to leading international
technologies and practices. The lack of innovation in the SEZs firms could also be explained on the
base of their short history, as many of them have become operational only very recently and they have
not had time or they have not yet experienced the need to introduce innovation in their production
systems. Moreover, these firms are markedly less connected to the domestic economy, sourcing and
selling mainly on international markets.
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Finally, and most importantly, the survey evidence suggests that the zones are not making a
120.
significant difference in improving the investment climate faced by investors, which may well
explain why we observe no major performance advantage in the SEZ-based firms. Firm
perceptions indicate that SEZ-based firms have a more negative view of the investment climate
than firms based outside the zones: almost no firm reported the investment climate being better in
the SEZs than outside them. Moreover, the main constraints identified by non SEZ-based firms are
almost precisely the same as those identified by firms in the SEZs. More objective measures across
these main areas of constraint also support the finding that the SEZs offer at best only a marginal
improvement in the investment climate.
One reason for this is that some of the biggest constraints identified by firms are issues that
121.
cannot readily be isolated and addressed inside the zones, in particular concerns about work-
force skills and of macroeconomic instability, as well as, to a lesser degree, corruption. But it
is also because the zones do not appear to be creating a significantly differentiated environment in
terms of infrastructure, customs, and the regulatory environment. To some degree this may be a
reflection that the Government has been relatively successful in making economy-wide improve-
ments. It may also raise some questions about the effectiveness of at least some of the private
developers.
SEZs have played an important role in attracting export-oriented foreign investment at an
122.
important time in Cambodia’s recent development by reducing the perceived risk for foreign
investors and by overcoming issues of access to secure land and facilities. Moreover, SEZs
have been instrumental in triggering important initial changes in Cambodia’s exports composition,
starting diversification in sectors with high potential, such as bicycle/vehicle assembly and electronics.
So the issue is more about where to go from here, and how to ensure the (increasingly proliferating)
SEZs can properly differentiate themselves and deliver clear value added to investors, as well as
provide an environment that promotes integration and spillovers between foreign investors and the
wider Cambodian economy.
2.10 Recommendations
123.
Priority measures that the Government could consider to address investors’ complaints include the
following:
Streamline the procedures in the one-stop-shops and introduce an automated risk manage-
i.
ment system for cargo shipment inspections, particularly those related to Camcontrol, in
order to reduce delays. Given the potentially huge impact that this could have on attracting FDI,
which is vital for Cambodia’s development, the Government could consider monitoring closely all
operations by ministry officials that take place within the zones, including asking for support from the
Anti-Corruption-Unit.
Support SEZs’ efforts to improve low skill-level of workers through vocational training in
ii.
order to improve productivity. A specific plan on supporting workers’ skills development could be
put in place with government support to a vocational training institute achieving economies of scale
across firms.
Undertake a needs assessment of the current infrastructure gaps, including in electricity,
iii.
water supply and transport, and negotiate arrangements with the SEZ operators to identify viable
long-term solutions to the problems outlined by SEZs’ firms.
The Investment Climate Climate Assessment 2014
74 Creating Oppor tunity for Firms in Cambodia
03
CHAPTER
COPING WITH A DEMANDING
INVESTMENT CLIMATE
II- THE INFORMAL SECTOR
KEY MESSAGES
 T
here is a “missing middle” of exporters among SMEs in Cambodia compared with other
countries. Firms perceive that the business environment favors large exporting firms and that
there is little perceived benefit of formality unless the firm intends to export.
 L
arger, foreign-owned and more capital intensive firms are more likely to be formally
registered and more likely to be exporters.
 T
FP is 39 percent higher in formal firms than in informal firms. Formalization of informal firms
could increase the aggregate productivity by over 10 percent.
 Formal firms pay higher wages (especially benefits) to workers and provide more training.
 I
nformality is not necessarily a stepping-stone towards formal status. The age of firms is not
linked with a rise in formality.
 T
ax is a disincentive to formality. The survey shows formally registered firms report
57 percent of sales for tax purposes, but for unregistered firms this is only 29 percent.
hile informal firms view electricity and transport as major or serious constraints to their
 W
operations, formal firms face more constraints in terms of customs and trade regulation, labor
regulations, corruption, crime/theft/disorder, anti-competitive or informal practices, legal
system/conflict resolution, tax rates, tax administration, skills and education of available
workers, and access to finance.
3.1 Introduction
Many firms in developing countries are operating informally and do not have all the necessary
124.
registrations required by law. Informal firms contribute strongly to employment creation absorbing
a large part of the labor supply in many developing countries. The informal sector is also often seen
as “the free entry sector of last resort” for workers who would rather be in formal employment
but have no other labor market opportunities. However, there are also ‘opportunity’ entrepreneurs
looking for firm growth and expansion, although few microenterprises make the successful transition
to larger firms.
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We find evidence that informal firms in Cambodia that grow the fastest are also most likely
125.
to formalize. Therefore, a policy that enables the informal sector to grow will be compatible with
and even supportive of a policy aiming at integrating informal firms within the formal sector over
time.. However, the existing evidence suggests that the impact of these policies typically only result
in a modest increase in the number of formal firms and their impact on performance is not always
clear (Bruhn & McKenzie, 2013).
The informal sector contributes significantly to Cambodia’s economy (see Section 3.5 of
126.
this Chapter). An important policy question within the Cambodian context is then whether this
segmentation between formal and informal firms creates a large macroeconomic inefficiency,
particularly as a disincentive to export. In other words, is it true that informal firms are less
productive and less likely to export than formal firms in Cambodia and, if so, by how much would
aggregate productivity be increased if informal firms operated formally? In particular, if the
marginal productivity of inputs varies across formal and informal firms, aggregate productivity
can be increased by moving resources away from the informal sector to the formal sector (e.g. by
repressing the informal sector through increases in fines, higher labor costs following more stringent
enforcement of labor laws, or outright closure and liquidation of informal sector firms) or by moving
resources from the formal sector to the informal sector (e.g. by improving the access to capital for
the informal sector).
There are benefits associated with formalization. First, the informal sector narrows the tax base
127.
and therefore reduces fiscal revenues. These lower tax revenues lead to higher tax rates in turn,
discouraging formal firms from investing and growing and also making it less likely for new and
existing firms to operate formally. Second, a tolerance for informal activities may erode law abidance
and nurture a culture of disrespect for the law (Bruhn & McKenzie, p.16).
Here we will consider three possible policy responses to the existence of the large informal
128.
sector in Cambodia. First, should the Government try to integrate the informal sector into the
formal sector, for instance by lowering registration fees, streamlining and automating regulatory
procedures, reducing waiting times and cracking down on informal payments, in order to increase
aggregate productivity and tax revenues? Or second, should the Government instead try to repress
the informal sector, for instance by more stringent enforcement of existing regulations, thereby
encouraging a flow of resources out of the informal sector into the formal sector? Or third, should the
Government further enable the informal sector to grow, for instance by improving the access to capital?
In this analysis we use data on informal and formal sector firms from the Cambodia ICA 2014.
129.
Because this survey includes firms with five or more workers, the analysis does not address the
issue of informality among microenterprises. While this may be seen as a weakness given that
informality rates are the highest among the smallest firms, a focus on larger firms is actually
especially interesting within the Cambodian context for a number of reasons.
Most of the microenterprises (with fewer than five workers) in Cambodia are informal.
130.
However, and remarkably, in Cambodia the informal sector also plays a surprisingly large role among
small (with 5-19 workers) and medium-sized firms (with 20-99 workers). Our survey shows that
69.7 percent of the small firms have no firm registration from the MoC or a provincial/municipal
commerce division and 45.0 percent of the same small firms have no tax registration. And even the larger
medium-sized firms are often operating informally, with 44.2 percent of them not having a firm
registration and 20.7 percent of them not having a tax registration (see Section 3.2 of this Chapter).
Therefore, while informality is the norm among microenterprises, macroeconomic efficiency may
potentially be strongly affected by informality among the larger firms.
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76 Creating Oppor tunity for Firms in Cambodia
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Second, the Cambodia ICA 2014 has been especially designed to capture informality, unlike
131.
previous ICA. The sampling frame for the survey is the 2009 Establishment Listing, which was
prepared for the 2011 Economic Census of Cambodia (a census of enterprises). The sampling frame
included a question whether a firm had a firm registration from the MoC, and this information was
used to stratify the sample by MoC registration (in addition to the usual stratification variables of
location, sector and firm size. See Chapter 1 in this report for details on the sampling procedure).
132. The structure of this chapter is as follows. In the next section we discuss the profile or characteristics
of informal firms in Cambodia. Informal firms are more likely to be smaller, less productive, active in
the trade sector, domestically oriented and owned, as well as less capital intensive. Next we
discuss the main causes of informality in Cambodia, showing evidence on the benefits and
costs from being informal in Cambodia. While informal firms view electricity and transport
more often as a major or serious constraints to their operation, they face fewer constraints in terms
of customs and trade regulation, labor regulations, corruption, crime/theft/disorder, anti-competitive
or informal practices, legal system/conflict resolution, tax rates, tax administration, skills and
education of available workers, and access to finance.
133. Section 3.5 discusses the contribution of the informal sector to the Cambodian economy, showing
that firms without firm registration contribute 25-30 percent of employment, capital (measured
as machinery, equipment and vehicles) and value added. However, the same informal firms contribute
more than 45 percent of total investment, suggesting that informal entrepreneurs expect (and
enjoy) high marginal returns to their capital investments. They are also reporting a lower share
of sales to the tax office than formal firms. In Section 5 we study the relative productivity of formal
versus informal firms in Cambodia. Similarly to the literature, we find that informal firms are
less productive than formal firms. However, we also note that the marginal productivity of capital
is higher on average in informal firms than in formal firms (but the marginal productivity of
labor is lower as reflected in the lower wages earned by workers in informal firms). We simulate
the impact of different policy scenarios on aggregate productivity, and we argue that policies
aimed at integrating and enabling the informal sector are more beneficial than policies of repression.
In the final section we discuss the policy recommendations that follow from the analysis.
3.2 Informality among Cambodian enterprises
134. The level of informality in an economy will depend on the relative costs and benefits of staying
informal. Although the term informality has been used in various ways, it can be most broadly
defined as those activities and entities that are unregistered and which avoid government regulation,
taxation, or observation (Schneider, 2000). Firms face a choice to register or not to register, and
therefore the level of informality in an economy will depend on the relative costs and benefits of
operating formally versus informally.
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3.2.1 Which firms have an incentive to register?
Given that registration can be costly and cumbersome, the ease of registration will affect the
135.
likelihood that a firm will be operating formally. According to the 2013 Cambodia Doing Business
Report, Cambodia stands at 175 in the ranking of 185 economies globally on the ease of starting
a business (World Bank, 2013). In practice, this implies that starting a limited liability company in Phnom
Penh with between 10 to 50 employees and conducting general commercial or industrial activities
requires 9 procedures, takes 85 days, and costs 100.5 percent of income per capita and requires
paid-in minimum capital of 28.5 percent of income per capita. This actually excludes any additional
costs in terms of time spent on gathering information, bribes, and any fees paid to any facilitators
assisting with the process (World Bank, 2013, pp.14-24). It has been reported elsewhere that these
latter costs can be substantial, as there is still widespread frustration among small businesses in
Cambodia regarding the difficulties and costs of formally setting up a business, where firms are often
asked to pay extra charges, and firms often feel compelled to hire facilitators, including government
officials to facilitate the process (IFC & The Asia Foundation 2009, pp.19-24).
Not surprisingly, in practice most firms in Cambodia do not register as fully formal enterprises
136.
and opt for lower levels of formality. A previous study by IFC identified five levels of formalization
in the Cambodian business context, namely: (i) fully formal – national level, (ii) fully formal – provincial
level, (iii) unregistered with operating license, (iv) possession of patent tax, and (v) fully informal
(see Annex V). The Doing Business studies focus on the registration process for fully formal firms
at the national level, but most firms will actually opt for a lower level of formalization.
In the 2011 Economic Census of Cambodia, all firms were asked whether they had a firm
137.
registration from the MoC, which is required for a firm to be operating fully formally at the national
level. In total 17,369 of a total of 505,134 enterprises surveyed in the 2011 Economic Census of
Cambodia were registered at MoC. Also, registration rates are very low for smaller firms and only reach
50 percent or higher for firms with at least 50 employees (Figure 3.1).
Figure 3.1: Percent of firm registration at MoC, by number of employees
100
80
60
40
20
0
1
2
3
4
5
6
7
8
9
19
9
9
9
9
er
-4
-9
49
99
ov
-
10
50
20
0-
0-
d
an
50
10
00
10
Source: : Economic Census 2011, National Institute of Statistics, Ministry of Planning, Phnom Penh (2012).
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78 Creating Oppor tunity for Firms in Cambodia
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The economy of Cambodia is highly informal, with only 3.4 percent of all firms registered
138.
with the MoC. Given that only larger firms tend to be registered, while about 97 percent of all firms
in Cambodia have less than 10 workers (2.6 percent have between 10-99 employees, and only
0.2 percent are large businesses with at least 100 employees), the economy is therefore highly
informal with only 3.4 percent of all firms counted in the Census being registered at the Ministry
of Commerce (National Institute of Statistics, Ministry of Planning, Cambodia 2012, Table 2-3-2).
The survey data shows that larger firms are more likely to be formal. Firms were asked about
139.
different types of registration, particularly whether they had: (i) a firm registration from MoC and/or
registration certificate from the provincial/municipal commerce division, (ii) a tax registration
from the Ministry of Finance, (iii) a VAT registration, and (iv) a Labor Department registration.22
Figure 3.2 reports the frequency of firms reporting these types of registrations across small
(less than 20 workers), medium (between 20 and 99 workers) and large (at least 100 workers)
firms. Once again, we note that the ICA 2014 only includes firms with at least 5 workers, hence
microenterprises are excluded.
Firms in Cambodia are more likely to have any of the four types of registrations when
140.
they are larger. Almost all of the large firms have a firm, tax, VAT and labor registration. The
lowest levels of registrations are found for the small firms. However, and remarkably, medium-sized
firms, which have at least 20 employees but less than 100 employees, are often also operating
without registrations—in total about 45 percent of the medium-sized firms have no firm
registration, 21 percent has no tax registration, 43 percent has no VAT registration and 55 percent has
no labor registration.
Figure 3.2: Frequency of registration by type and firm size
100
80
60
40 Small
20 Medium
0
Large
on ion ion ion
ati t t t All
i str ist
ra
ist
ra ist
ra
reg reg reg reg
ﬁrm tax VA
T or
lab
Percent of ﬁrms
Source: World Bank Enterprise Survey, 2012.
22
irms were also asked whether they registered at the ‘municipality’ but the exact type of registration is not clear here.
F
However, among all firms which did not get at least one of these four types of registrations, only 1.9 percent reported to be
registered with municipality. We therefore limit the analysis to these four types of registrations which are clearly defined and
virtually all firms with some type of registration reported at least one of these types of registrations. Six out of 775
firms in the survey reported that they had registered at the municipality but did not report any other register.
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 79
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141.
Hence, firm size and export status is an important predictor of whether a firm is operating formally
or informally in Cambodia. In the next table we compare the distribution across sectors and
locations of firms that have a firm registration with those that do not have this registration. It can
be seen that firms without firm registration (at the MoC or at a provincial/municipal commerce
division) are strongly overrepresented in trade and in Kampong Cham, and strongly underrepresented
in tourism and in Phnom Penh and Siem Reap (Figure 3.3).
Figure 3.3: Sector and location by firm registration
Percent of ﬁrms
60
50
40
30
No
20
Yes
10
0
g
ss
in ing trad
e m ther nh ng ham le ap
e r ris o Pe ba Vil m Re
roc ctu to u
om m g C k
rop nu
fa n tta on anou Sie
ag Ph Ba amp
ma K Sih
Source: World Bank Enterprise Surveys, 2012.
3.2.2 Which firms decide to stay informal?
Informal firms are less likely to export and less likely to be foreign owned. (Figure 3.4). This
142.
is understandable, as foreign firms are highly visible and formal exports require paperwork to
be issued at least by Customs (Export Permit, Export Declaration, etc.) and the MoC (CO, etc.).
Interestingly, however, informal firms are, on aveage, not younger than formal firms, suggesting
that informality is not necessarily a stepping stone towards formal status.
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80 Creating Oppor tunity for Firms in Cambodia
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Figure 3.4: Age of firm, export status and ownership by firm registration
Percent
15
13
11
9
7
5
3 No
1 Yes
-1
) )
ars) ort
s hip 00 00
(ye xp rs `0 `0
ye ne S$ S$
rm an ow (U (U
fﬁ gn or or
ge
o ei ab ab
a for a l/l d/l
an
y pit va
ca
Source: World Bank Enterprise Survey, 2012.
Registered firms tend to be more capital intensive and more productive. This is in line with
143.
previous studies showing that formal sector firms tend to be more capital-intensive and hence
productive than informal sector firms. The reason for this may be that formal firms benefit from better
access to markets, finance, infrastructure and government services, making them more productive.
An alternative reason may be that formal sector firms compete with informal firms, and the
productivity differential reflects the marginal cost of operating in the formal sector (e.g., the payment
of taxes, time cost of management dealing with regulations). And finally, the productivity differential
may simply reflect a selection effect, where more productive entrepreneurs are more likely to
register their firm because they either are more skillful at navigating the regulatory environment
or extracting benefits from being formal (e.g., take better advantage of the better access to markets,
finance, infrastructure, and government services).
But the productivity difference is actually not very large. This suggests that informal firms are
144.
often as productive as informal firms in Cambodia (see Annex II for a multivariate analysis of the
productivity differential).
Firms are more likely to be registered if they are large, foreign-owned, and more capital-intensive
145.
or have higher labor productivity. Multivariate regressions predicting whether a firm has either
a firm, tax, VAT or labor registration (see Annex VI) show that for each type the likelihood of
registration is higher for firms that are larger, are foreign-owned, and are more capital-intensive or
have a higher labor productivity. Also after controlling for other firm characteristics, firms that are
located in Kampong Cham are much less likely to be registered, suggesting that enforcement is not
uniform across locations.
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3.3 The Link between informality and export status
Cambodia’s number of exporters (around 600 each year) is lower than expected given its stage
146.
of development (red line). In fact, export participation in Cambodia is similar to that of Burkina Faso
and Malawi, countries with lower income per-capita.
Figure 3.5: Number of exporters and per-capita GDP, 2009
Source: : Cebeci et al (2012).
he low level of export participation in Cambodia is the result of very few SMEs being able
147. T
to reach international markets. A well-established empirical fact is that the distribution of export
value across firms resembles a Pareto-shaped distribution: Many small and mid-size firms and very
few large enterprises that drive export performance. These trends are common to most countries in
the world and to most natural and social phenomena.23 While this finding is relatively stable across
countries it does not apply to Cambodia. Figure 3.6 plots the distribution of export value of
exporting firms in 2009 in Cambodia and compares it with that of Pakistan and Kenya, countries with
similar per-capita income level. Results indicate that the distribution of export value in Cambodia
follows an asymmetric bimodal distribution with some small firms, very few mid-size exporters
and relatively many large firms. This distribution is very different than in the majority of countries
across the globe and indicates the presence of factors that discourage export activity for mid-size
enterprises.
The distribution of countries, cities, rivers, mountains, incomes, oil reserves in oil fields, meteorite sizes are all examples
23
characterized by the same asymmetric patterns: few large specimens account for the bulk of the total but coexist with
a high number of smaller, less important ones.
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82 Creating Oppor tunity for Firms in Cambodia
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Figure 3.6: Distribution of export value across firms, 2009
2
1.5
1
.5
0
.5 1 1.5 2
Normalized Export Value
Cambodia Pakistan
Kenya
Note: This figure compares the distribution of export value among exporting firms in Cambodia, Kenya, and Pakistan in
2009. Export value is normalized by the median of each country distribution.
Source: Authors’ computation using the World Bank Export Dynamics Database.
Cambodian exporters are, on average, relatively larger than those in sized similar countries.
148.
The shortage of mid-size exporters implies that when we look at the aggregate pull of exporting firms,
Cambodian exporters are, on average, relatively larger in relation to similar countries (both in terms of
export value and number of products), show very low level of export concentration, and display a very
high level of survival in international markets. All in all, Cambodia is an outlier among all countries for which
firm-level export data is available. Figure 3.7 shows these indicators for the set of countries available
in the Exporter Dynamics Database (EDD). The first panel, upper left corner, shows the mean export
value per exporter while the second panel, upper right corner, depicts the mean number of products
per exporter. These two indicators are proxies for the size of exporters and indicate that Cambodian
exporters are excessively big, in average, for the country’s level of development. In fact, the average
Cambodia firm exports an amount equivalent to that of its Mexican counterpart. This confirms the fact
that the few Cambodian firms that make it to international markets are relative big whereas other
countries have a much larger share of small-and medium-size exportersthat drives the averages down
remarkably.
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Figure 3.7: Export size, concentration and survival rate, 2009
Source : Cebeci et al (2012).
3.4 Costs and benefits of informality in Cambodia
3.4.1 Constraints perceived by formal vs. informal firms
Many firms in Cambodia remain unregistered because the benefits do not exceed the costs
149.
of being registered. Earlier studies have suggested that tax burden, intensity of regulations, and
corruption are among the main causes of people pursuing their business outside the formal system
(Schneider et al., 2010).
Firms report different constraints to the operations of their business depending on their
150.
registration status in Cambodia, reflecting different costs and benefits to operating formally
rather than informally (Figure 3.8). 24 Considering only the constraints for which the responses between
formal and informal firms are statistically different at the 10 percent significance level, informal firms
are only more likely to report major or very severe problems with transportation and electricity.
24
See also Annex VII.
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84 Creating Oppor tunity for Firms in Cambodia
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Figure 3.8: Reported major and severe constraints-different responses between informal and formal firms
Percent
30
20
10
0
-10
-20
-30
Transportation
Telecommunications
Access to Land
Cost of Financing (e.g. interest rates)
Business Licensing and Operating Permits
Labor Regulations
Skills and Education of Available Workers
Access to Financing (e.g. collateral)
Tax rates
Tax administration
Customs and Trade Regulations
Legal system/conﬂict resolution
Anti-competitive or informal practices
Corruption
Macroeconomic Instability
Regulatory Policy Uncertainty
Electricity
Crime, theft and disorder
ﬁrm tax VAT labor
Source : World Bank Enterprise Survey, 2012.
There are different electricity rates for corporate and individual consumers. A reason that informal
151.
firms might complain more about electricity being a constraint to the operation of the firm is that there
are different rates for corporate and individual consumers. Informal firms are more likely to pay the
(lower) individual consumer price but they are likely to feel pressure to limit their monthly electricity
consumption to avoid attention of and possibly an inquiry by the Electricité du Cambodge (EDC).
I t is less clear why informal firms complain much more frequently about transportation
152.
problems. This is still the case even after controlling in a multivariate regression analysis for sector,
location, firm size, firm age, export status, foreign ownership, capital intensity, labor productivity and
shares of primary, secondary and upper secondary worker (regression results not reported). Complaints
might be due to possible higher informal payments requested by road police when intercepting a cargo
shipped by an informal firm.
For all other constraints for which there are statistical differences in responses between formal
153.
and informal firms, formal firms complain more. They complain more about customs and trade
regulation, labor regulations, corruption, crime/theft/disorder, anti-competitive or informal practices,
legal system/conflict resolution mechanisms, tax rates, tax administration, skills and education of
available workers, and access to finance. The fact that formal sector firms also complain more about
crime/theft/disorder, skills and education of available workers, and access to finance, may be explained
by the fact that formal sector firms tend to be larger, use more skill-intensive technology, and use more
formal finance.
Complaints about regulatory problems (both red tape and corruption) are clearly linked to the
154.
formal status of a firm. The same holds for complaints about tax rates and tax administration—about
which firms with a tax registration complain significantly more. Also the significantly higher complaints
about anti-competitive or informal practices is related to the formal status of firms, especially formal
firms face a competitive disadvantage in the competition with informal firms enjoying a cost advan-
tage because of regulatory avoidance.
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Figure 3.9: Firm has line of credit or bank loan, by formal status
Percent
40
35.2
35
30
25
20
15
17.7
10
5
0
No Yes
Source : World Bank Enterprise Survey, 2012 .
In Cambodia, formal sector firms are much more likely to have a line of credit or bank loan from
155.
a financial institution than an informal firm (Figure 3.9). Specifically, 35.2 percent of the firms with
a firm registration (at MoC or affiliated department) reports having a line of credit or bank loan from
a financial institution, against only 17.7 percent for the unregistered firms. If we control for firm
characteristics, we still find that firms with a firm registration have a 11.5 percent higher probability
to have a line of credit and/or bank loan (regression results not reported).
However, the importance of formal sector finance as a source of working and investment capital
156.
varies little by the formal status of a firm. Virtually all working and investment capital comes from
internal funds (97.7 and 94.8 percent, respectively), and while banks are somewhat more important
as a source of finance for formal sector firms for working and investment capital (1.7 versus 0.9
percent for working capital, 3.7 versus 3.1 percent for investment capital), the differences are marginal.
This suggests that firms benefit relatively little from better access to finance when they formalize,
which is a corollary of the overall unimportance of bank lending for financing firm activities in Cambodia.
3.4.2 When do firms decide to become formal?
It is difficult to predict willingness of informal firms in Cambodia to formalize following, say,
157.
future changes in the regulatory environment. However, the evidence on the effects of entry
reforms and related policy actions on firm formalization from other countries show that these reforms
induce only a modest increase in the number of formal firms (Bruhn & McKenzie, 2013). Still, in order to
obtain somewhat more insight in the formalization decision, it is useful to look at the dynamics of firm
registrations.
If a firm registers, it does so usually in the start-up year of a firm. Firms that started in 2000
158.
or later are registered at a higher rate than firms that started before. For firms that started in the
period before 2000, 18 percent registered in the start-up year and after 10 years a total of 27 percent
of the (surviving) firms were registered. For firms that started in 2000 or later, the initial registration
rate was already 35 percent in the start-up year and 38 percent after 10 years.
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Figure 3.10: Proportion of firms that remains unregistered by firm age and period of start-up
1.00
0.75
0.50
0.25
0.00
0 10 20 30 40
Analysis time
period = start-up before 2000 period = start-up 2000 and after
Source : World Bank Enterprise Survey, 2012.
The fact that firm registration takes place primarily in the year of start-up implies that most
159.
informality is not a transitory phenomenon that changes as a firm grows older. Nevertheless,
some firms are changing from informal to formal status, and the question is what drives these
transitions. Unfortunately, we do not have much information on the firm at the moment of startup,
but the number of permanent employees in 2008 is known. We therefore compare the growth of (log)
employment of firms between 2008 and 2012 by formal status in 2008 and 2012 in Figure 3.11.
Figure 3.11: Mean and median change in log employment 2008-12, by registration status
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
Never registered Registered in 2008- Always registered
2008-2012 2012 2008-2012
Mean growth Median growth
Source : World Bank Enterprise Survey, 2012.
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Firms that were never or always registered show similar levels of employment growth over
160.
the period 2008-12. Interestingly, firms that switched from informal to formal status in the same
period show the highest employment growth, both in terms of mean and median employment growth25.
Firms may become more formal because they become more visible as they grow, or, because the
benefits of formality are larger for expanding firms (e.g., better access to finance and foreign markets).
The high cost for registration might then also be a reason for companies to decide to become
161.
formal only when they can afford it. Cambodia ranks 184th out of 189 economies in the overall
ease of starting a business. It takes an entrepreneur 104 days to go through the 11 formal procedures
needed to start a business in Phnom Penh, though a substantial reform effort has been launched
at MOC to improve these indicators. In the process, the entrepreneur has to pay official costs equal
to 150.6 percent of the country’s per capita income. In comparison, an entrepreneur starting a similar
business in Bangkok would undergo four procedures in 27.5 days, while one in Kuala Lumpur
would have to complete three procedures in six days. Costs are also substantially lower in Thailand
and Malaysia.
C ontribution of the informal sector to the economy
3.5
in Cambodia
The informal sector is an important part of the economy in many developing countries, and it
162.
has been estimated that over 30 percent of value added and 70 percent of employment in
developing countries are to some degree informal (World Bank, 2007). Also it is not clear whether
economic development per se will reduce the size of the informal sector (Schneider et al., 2010).
The sheer number of microenterprises contributes a sizeable part of the economy. A simple
163.
reason why the informal sector is so important is that it includes a multitude of microenterprises
that tend to be informal, and the sheer number of these microenterprises contributes a sizeable part
of the economy (although more in terms of employment than value added given that labor productivity
is typically lower in smaller firms).
3.5.1 Employment, capital, investment and value added in the
informal sector
T he enterprise survey 2012 covers firms with at least five employees in manufacturing
164.
(including agro-processing), trade, tourism, and other (construction, transport, computer programming,
consultancy and related activities). Among these firms, most of employment, capital, investment
and value added are generated in the formal sector (Table 3.1).
25
e report mean and median employment growth because the sample of firms that switched formal status includes only 16
W
firms. The fact that the pattern for mean and median employment growth are similar, suggests that the small sample size of the
‘switchers’ is not driving the results.
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Table 3.1: Contribution of informal sector (share)
No firm No tax No VAT No labor
registration registration registration registration
Employment
Male 38.6 21.9 37.4 46.4
Female 19.9 10.4 20.3 25.0
Total 27.9 15.3 27.6 34.1
Capital 30.3 16.4 31.0 38.0
Investment 43.9 18.2 30.1 54.4
Value added 26.6 11.1 25.7 31.4
Note: Capital and investment relates to machinery, equipment (including computers) and vehicles.
Source: World Bank Enterprise Survey, 2012.
The informal sector contributes significantly to the Cambodian economy. Among the firms that
165.
have no firm registration with MoC or a provincial/municipal commerce division, the informal sector
contributes about 27-30 percent of employment, capital and value added. Remarkably, the informal
sector contributes a disproportionate share of investment, namely 43.9 percent among the firms
without a firm registration. In the next section we will show that the returns to investment are relatively
high in the informal sector, explaining this high investment contribution from the informal sector.
The informal sector also contributes strongly to medium-size firms. Also remarkable is that
166.
the informal sector not only contributes strongly among the small firms (with 5-19 employees), but
also among the medium-size firms (with 20-99 employees) (Figure 3.12). Among the small firms, the
informal sector contributes about two-thirds of the total in terms of employment, capital, investment
and value added. Among the medium-sized firms, the informal sector still contributes about one-third
of the total. Only among the large firms is the contribution of the informal sector minor. This shows
that in Cambodia the significance of the informal sector is not limited to small (and micro) enterprises
but also includes medium-sized enterprises.
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Figure 3.12: Contribution by firms without firm registration by firm size
90.0
80.0
70.0 small
60.0
medium
50.0
40.0 large
30.0
20.0 all
10.0
0.0
l
t
d
nt
ita
en
de
me
p
tm
ad
Ca
loy
es
lue
Inv
p
Em
Va
Source : World Bank Enterprise Survey, 2012.
3.5.2 Informal firms’ sales and tax payments
167.
The contribution of the informal sector in Cambodia may actually be underestimated because firms
tend to underreport their firm activities, and this is especially the case for informal firms. Firms have
been asked the following question: “Recognizing the difficulties many enterprises face in complying
with taxes and regulations, what percent of total sales would you estimate the typical establishment
in your area of activity reports for tax purposes?” Table 3.2 reports the mean responses by registration
status and firm size.
Table 3.2: Share of sales reported for tax purposes by typical firm in same area of activity
by formal status and firm size
firm tax VAT labor
registration registration registration registration
Not registered
Small 27.9 21.9 30.3 29.5
Medium 39.9 49.0 48.7 44.7
Large 71.3 - 80.7 76.9
All 28.7 23.1 31.4 30.6
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firm tax VAT labor
registration registration registration registration
Registered
Small 52.5 46.4 47.4 59.7
Medium 69.3 58.2 61.9 70.4
Large 86.2 85.8 86.0 86.6
All 57.0 49.3 52.0 63.8
Source: World Bank Enterprise Survey, 2012.
For any firm size it is clear that informal firms report less of their sales to the tax office.
168.
Moreover, smaller firms tend to report a significantly lower share of their sales than larger firms.
Overall, non-registered firms underreport about twice as much as registered firms. For example,
firms that are registered with MoC or a provincial/municipal commerce division report 57
percent of sales to taxes against 29 percent for firms that do not have this type of registration.
nderreporting should also be expected in the survey especially for informal firms. Although
169. U
it is not known to what extent these same firms underreport their own sales (and other variables) in
the ICA (as opposed to the tax authorities), we also expect some underreporting in the survey especially
for informal firms. This implies that the contribution of the informal sector may be actually
underreported in Table 3.2 and Figure 3.12. Also the large contribution of the informal sector, together
with the higher rate of under-reporting, implies that there is a large loss to government revenues
through uncollected taxes in the informal sector.
Formal firms also under-report their sales for tax purposes. Table 3.2 shows that formal firms
170.
also significantly under-report their sales for tax purposes. Based on their perception, firms with
a firm registration believed that business of their nature (on average) reported only 57 percent of their
sales to tax purposes. This is a significant finding as it shows that formalization as a tool to improve
tax collection will have its limits. Cambodia’s tax collection remains relatively low compared with
regional standards and the Government has recently taken great efforts and actions to combat tax
evasion and to strengthen the tax administration. A medium-term Revenue Mobilization Strategy
2013-2018 has been drafted, targeting to raise its revenue (mostly from taxes) by 0.5 percentage
point of GDP per annum with the expectation of moving up its domestic revenue-to-GDP ratio of
13.2 percent in 2011 to 16.5 percent in 2018.
3.5.3 Wages and training in the informal sector
The informal sector contributes 28 percent of total employment in firms with more than 5
171.
employees. It was already shown that the informal sector, if defined by a lack of a firm registration
at a Ministry of Commerce or a provincial/municipal commerce division, contributes 28 percent
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of total employment among firms with at least 5 employees and which are active in the selected
ICA sectors. This is an important contribution to the economy, even if Cambodia enjoys a high labor force
participation rate, namely 87 percent for the population between 15–64 years old, and a very low rate
of unemployment (Socio-Economic Survey, 2010). Paid employment is often preferred to
self-employment, and a job in the informal sector can be a stepping stone for a higher paid job in the
formal sector.
The basic wage excluding benefits for an unskilled worker is the same for firms without and
172.
with a firm registration, namely US$73 (Figure 3.13). However, workers in the formal sector enjoy
better benefits, and unskilled wages including benefits are US$10 higher per month. These higher
benefits in the formal sector probably reflect a relatively stronger bargaining power for formal sector
workers as well as rent-sharing.
Figure 3.13: Average monthly wage without and with benefits by firm registration
In US$
120
100
80
60
40
20
0
Excluding beneﬁts Including beneﬁts
No ﬁrm registration Firm registration
Source : World Bank Enterprise Survey, 2012.
he labor force in Cambodia has predominantly low skills, with 93 percent of the labor force
173. T
having at most lower secondary education level. The ICA 2012 firms employ relatively more skilled
workers, as only 74 percent of their workers had at most lower secondary education. Formal sector
firms tend to employ more skilled workers, with 34 percent of their workers having more than lower
secondary education as against 22 percent for firms without a firm registration.
On average, 20.4 percent of the firms indicated that the skills and education of available
174.
workers was a major or very severe constraint to the operation of the business. Problems with
skills were reported by both formal and informal sector firms, although at a somewhat higher rate
by the former. Given the generally low level of skills available in the labor force, firms often invest in
formal training programs. Formal firms are much more likely to invest in formal training than informal
sector firms, however (Figure 3.14). This is also the case if one controls for differences in firm
characteristics (sector, location, firm size and age, exports, foreign ownership, capital intensity and
labor productivity, and education level of workers).26 Then formal sector firms have a 10 percent point
higher probability of having a formal training program compared with similar informal sector firms.
26
Regression results not reported.
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Figure 3.14: Firm has formal training program
70
61.3
60
50
40 36.6
30
20
10
0
No ﬁrm registration Firm registration
Source : World Bank Enterprise Survey, 2012.
175. Although the informal sector employs a significant share of workers, it does not contribute
proportionately towards wages and training. This shows that although the informal sector
contributes significantly to employment, it contributes less than its share in terms of wages (unskilled
wages including benefits are lower) and worker training. Especially the lower level investments in
training in the informal sector represents a long-term cost to the Cambodian economy—more
training facilities are increasingly needed to upgrade the skills of the labor force allowing the Cambodian
business sector to upgrade its technology, improve its productivity level and to increase its
(comparatively) low wage levels.
3.6 Informal economy and macroeconomic efficiency
176. There are three possible policy responses to the existence of the large informal sector in
Cambodia. First, the Government can try to formalize the informal sector, for instance by lowering
registration fees, streamlining and automating regulatory procedures, reducing waiting times and
cracking down on informal payments, in order to increase aggregate productivity and tax revenues.
Second, the Government can try to repress the informal sector, for instance by more stringent
enforcement of existing regulations, thereby encouraging a flow of resources out of the informal
sector into the formal sector. Or third, the Government can adopt enabling policies for the informal sector
to grow, for instance by improving the access to capital.
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irst policy option: create incentives to formalize the
3.6.1: F
informal sector
177. If firms in the informal sector are less productive, policies to formalize informal firms will create
an aggregate productivity gain. Many studies have found a positive empirical relationship between
productivity and formal status of a firm (Farrell, 2004; La Porta & Shleifer, 2008; Bruhn & McKenzie,
2013). If this relationship reflects a genuine impact of formal status on productivity, and not just
a selection effect where more productive firms are more likely choosing to operate formally, policies
encouraging formalization of the informal sector will be productivity enhancing.
178. Productivity is significantly higher for registered firms than unregistered firms. In Cambodia, the
mean labor productivity of firms with a firm registration (at MoC or a provincial/municipal commerce
division) is US$5,648 against US$4,980 for firms without a firm registration (Figure 3.15). The figure
also shows that formal sector firms are more capital-intensive (US$1,605 versus US$1,151), where
capital is measured by the replacement cost of machinery, equipment and vehicles, and this may be one
reason why labor productivity is higher among formal sector firms.
Figure 3.15: Labor productivity and capital intensity by formal status (US$)
6000 5648
4980
5000
4000
3000
2000 1605
1151
1000
0
labor productivity capital intensity
No ﬁrm registration Firm registration
Source : World Bank Enterprise Survey, 2012.
Productivity differences between formal and informal firms may be for a number of other
179.
reasons. The productivity between formal and informal sector firms may also vary because of
other reasons, such as differences in sector of activity, location, skill-intensity, ownership structure
and export orientation. After controlling for these factors as well as capital intensity, a formal sector
firm is actually 39 percent more productive (or in other words, have a 39 percent higher total factor
productivity) than an otherwise similar informal sector firm. 27
27
Regression results not reported.
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However, the marginal revenue product of capital (MRPK) is higher for informal firms than
180.
formal firms on average (Figure 3.16).28 Although the median marginal returns to capital are
lower, the mean is higher because the informal sector includes a relatively large proportion of firms with
high marginal returns to capital. Because there is also a relatively large proportion of informal firms
with relatively low marginal returns to capital, the dispersion (standard deviation) of MRPK is higher
for informal firms than formal firms.
Figure 3.16: Mean, median and dispersal of marginal revenue products of capital
and labor, by formal status. (US$)
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
mean median sd mean median sd
MRPK MRPL
No ﬁrm registration Firm registration
Source : World Bank Enterprise Survey, 2012.
181.
Figure 3.17 also shows that the marginal revenue product of labor (MRPL) is lower in the informal
sector compared with the formal sector, both in terms of the mean and median. This is as expected
as informal firms pay lower wages and profit-maximizing firms will hire workers up to the point
where the MRPL equals the wage. The fact that the mean marginal returns to capital are
higher in the informal sector, however, suggests that the cost of capital is higher for informal sector
firms. This may reflect the fact that informal sector firms have lower access to formal sources of
finance, forcing them to use more costly alternative sources. An alternative explanation for the high
returns in the informal sector could be that lenders demand a higher risk premium when lending
to unregistered firms. However, informal firms show a much higher rate of investment than
informal firms (0.50 versus 0.27), which suggests that the higher marginal returns do outweigh any
possible higher risks in the informal sector.
28
For this, we estimate a Cobb-Douglas production function for both the formal and informal sector (see columns
2 and 3 in Annex VII), and calculate the marginal capital productivity for each firm in the sample.
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Figure 3.17: Log scale of marginal revenue product capital: formal vs. informal
.4
.3
.2
.1
0
-4 -2 0 2
Marginal Revenue Product of Capital (log)
Informal Formal
Source : World Bank Enterprise Survey, 2012.
We find that aggregate productivity would increase by about 1.1 percent for each additional
182.
10 percent of informal firms being formalized (solid line in Figure 3.18).29 Previous studies have
shown that a large reduction in the cost and time taken to register a firm leads only to a modest
increase in the number of formal firms. Therefore, we simulate the aggregate productivity gain if
subsets of informal firms were to start operating in the formal sector. If we assume that an
informal firm were to start operating according to the production technology used by formal sector
firms (column 2 in Annex II Table 2.2), then we can predict for each informal sector firm the
counterfactual production that would be achieved if the firm became formal.
Figure 3.18: Aggregate gain in productivity by degree of formalization of informal sector
12
10
8
6
4
2
0
0.0 20.0 40.0 60.0 80.0 100.0
Percent of informal ﬁrms formalized
Source : World Bank Enterprise Survey, 2012.
The aggregate gain to productivity differs from the mean firm-level difference in total factor productivity because aggregate
29
productivity is a weighted average of the estimated firm-level productivity effect of formalization which is heterogeneous
across firms.
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The observed productivity differential between informal and formal firms may reflect
183.
selectivity effects rather than genuine productivity effects from becoming formal. One may
argue that the estimated productivity gain will be overestimated if firms weigh up the potential
benefits of being formal with the costs of becoming and being formal, and therefore the observed
productivity differential between informal and formal firms may reflect selectivity effects rather
than genuine productivity effects from becoming formal (McKenzie & Bruhn, 2013). However, the
estimated production function does control for various observed firm characteristics, such as sector
of activity, location, skill-intensity, ownership structure and export orientation, and capital-intensity.30
Higher rates of formalization will also increase tax revenues, raise workers’ wages (especially
184.
benefits), and improve workers’ skills through more training. Hence, the overall benefits from
formalization might be sizeable even if the aggregate productivity gain may be overestimated.
Also, if the firms that expect the highest productivity gain from formalization are more likely to
choose to operate in the formal sector, the aggregate productivity gain will be higher than shown in
Figure 3.18, as long as not all informal firms become formalized (see the broken line in Figure 3.18).
econd policy option: enforce regulations to force informal firms
3.6.2 S
to become formal
nformal sector firms may be reluctant to formalize, especially if the benefits from doing so
185. I
accrue to other stakeholders than the firm owners. Therefore, an alternative policy avenue for
the Government may be to encourage a flow of resources out of the informal sector into the formal
sector, for instance by a more stringent enforcement of existing regulations. This will lower the
(expected) returns in the informal sector and, as a result, resources (such as capital and labor) will
move out of the informal into the formal sector (although some firms may simply choose to become
formal as well).
What would be the aggregate productivity impact of this policy of repression? Let’s assume that
a certain percentage of the informal firms close shop and that its resources, capital and labor in
particular, are moving towards the formal sector. For simplicity we assume that a random percentage of
informal firms close, and that resources are reallocated proportionally to the existing resources in the
formal firms.31 Figure 3.19 shows that the aggregate productivity gain from liquidating informal sector
firms and moving the resources (capital and labor) to the formal sector is linear with the percentage of
in formal firms liquidated. For instance, liquidating 20 percent of the informal sector would
generate a 0.5 percent gain in aggregate productivity, while a 50 percent liquidation rate would
increase aggregate productivity by 1.25 percent. Of course, if liquidation is selective and low
productivity firms are liquidated at a higher rate, the gain in aggregate productivity will be higher,
as long as not all informal firms are liquidated (broken line in Figure 3.19).
30
It is still possible, that the estimated productivity effect is (partly) driven by unobserved differences between formal and informal
sector firms, but it is difficult to control for this for two reasons. First, although the ICA 2012 includes a panel component, this
includes primarily formal sector firms. And second, the formal status of a firm does rarely change over time, and hence it is
difficult to identify the productivity impact of formalization in the presence of time invariant unobserved effects.
31
Implying that the capital and labor inputs in all formal firms are increasing at the same rate.
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Figure 3.19: Aggregate gain in productivity by degree of liquidation of informal sector
12
10
8
6
4
2
0
0.0 20.0 40.0 60.0 80.0 100.0
Percent of informal ﬁrms closed
Source : World Bank Enterprise Survey, 2012.
Liquidation of the informal sector leads to increased production in the formal sector due to
186.
the reallocation of capital and labor from the informal to the formal sector. Within the Cambodian
context, the net gain is relatively small, especially if compared with a situation when informal
sector firms become formalized (compare Figures 3.18 and 3.19). The productivity gain in Figure 3.20
is overestimated if a reallocation of labor from the informal sector to the formal sector reduces
the mean skill level in the formal sector. At the same time, the expansion of the formal sector will
generate additional benefits in terms of increases in tax revenues, wages (benefits), and training.
3.6.3 Third policy option: support growth of informal firms
nother policy option would be to adopt enabling policies allowing the informal sector to grow.
187. A
In Cambodia, the marginal returns to capital are actually somewhat higher in the informal sector than
formal sector. Also, informal firms that grow the fastest, are the most likely to subsequently become
formal. Therefore, one possible policy option would be to improve the access to capital for informal
sector firms to take advantage of their relatively higher returns stimulating informal sector growth.
188. F
igure 3.20 shows the aggregate productivity gain if one increased the capital utilized in the
informal sector (as percent of the existing informal sector capital stock). We assume that capital is
increasing proportionally in each informal firm. The marginal revenue product of capital in the
informal sector (broken line in Figure 3.20) becomes equal to that in the formal sector (dotted
line in Figure 3.20), if informal sector firms increase their capital stock by 11.5 percent. The total
gain in aggregate productivity would be 0.6 percent.
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Figure 3.20: Aggregate gain in productivity by increase in capital of informal sector
2.0
1.8
1.6
1.4 MRPK equal In formal and Informal sector
1.2
1.0
0.8
0.6
0.4
0.2
0.0
0 5 10 15 20
Increase in capital of informal ﬁrms%
MRPK informal MRPK formal Productivity gain
Source : World Bank Enterprise Survey, 2012.
3.7 Conclusions
ggregate productivity gains appear to be especially high if informal sector firms are incentivized
189. A
to operate formally. This will require serious reforms in different areas, however, as formal
firms experience more serious constraints than informal firms in the areas of customs and
trade regulation, labor regulations, corruption, crime/theft/disorder, anti-competitive or informal
practices, legal system/conflict resolution, tax rates, tax administration, skills and education of
available workers, and access to finance. Hence, in order to entice informal firms to move into the
formal sector, policies need to be in place to reduce these constraints. The benefits from such
reforms, however, are not only increases in aggregate productivity, but also higher tax revenues, higher
wages (especially benefits), as well as a more skilled labor force.
mproved access to capital for informal sector firms can also contribute to further growth in
190. I
the Cambodian economy, given that the marginal returns to capital are at least as high, if not
higher, in the informal sector compared with the formal sector. The disproportionally large
contribution to investment of the informal sector is also a reflection of these relatively high
returns. Growing informal firms are also more likely to start operating in the formal sector, and
therefore an enabling policy for the informal sector is not necessarily in conflict with a policy to
increase the formal sector over time.
191.
In conclusion, given that the informal sector contributes less to tax revenues, pays lower wages
(benefits) and provides less training to its workers, an enabling policy for the informal sector can be
best combined with a policy that improves the incentives to formalize.
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3.8 Recommendations
192.
The following recommendations have been based on the conclusions drawn in the analysis
presented above:
conomic policies should not ignore the informal sector as it contributes significantly to the
i. E
Cambodian economy. This follows from the fact that informality is not limited to only micro
enterprises in Cambodia. About 70 percent of small firms and 45 percent of medium-sized firms
have no firm registration at the MoC or a provincial/municipal commerce division. As a
consequence, firms without a firm registration contribute significantly to the overall economy,
namely 27-30 percent of aggregate employment, capital and value added, and 44 percent of
investment.
Policy makers should prioritize policies to encourage the informal sector to both grow and
ii.
start operating formally, rather than repress the informal sector. Total factor productivity is
39 percent higher in formal sector firms than in informal sector firms and therefore the formaliza-
tion of the informal sector can potentially increase aggregate productivity by more than 10 percent.
Also formal sector firms contribute more to fiscal revenues, pay higher wages (especially
benefits) to their workers and provide more training. For these reasons, policies should be directed
at encouraging firms to start operating formally. At the same time, informal firms that grow the
fastest are also most likely to switch to the formal sector, and the marginal revenue product
of capital is higher in the informal than formal sector. Therefore, policies that improve the access
of capital to informal sector firms can also contribute to macroeconomic efficiency and even
formalization over time. Policies of ‘repression’ aimed at the liquidation of informal sector firms
appear to create little gain in aggregate productivity and would imply large adjustment and
enforcement costs and are therefore not recommended.
iii. Increases in tax revenues will depend both on encouraging the formalization of informal
sector firms and on improving tax collection mechanisms. Informal sector firms report only
about half as much of their sales for tax purposes compared with formal sector firms and
therefore formalization of the informal sector will have a significant positive impact on tax revenues.
At the same time, even formal sector firms report only 57 percent of their sales for tax
purposes, and therefore improved tax collection procedures are needed to further significantly
increase fiscal resources for the Government.
iv. Improvements in the investment climate are needed to reduce the size of the informal sector.
This follows from the fact that formal sector firms tend to face much more frequently major
or serious obstacles to the operation of their business than informal firms stemming
from challenges in the investment climate, particularly with respect to customs and trade
regulation, labor regulations, corruption, crime/theft/disorder, anti-competitive or informal
practices, legal system/conflict resolution, tax rates, tax administration, skills and education
of available workers, and access to finance.
Efforts of the MoC in the area of improving company registration procedures should be scaled
193.
up, building on the results achieved in the past decade when many firms have decided to register under
the system. Indeed firms nowadays are more likely to register at start-up than in the past.
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R egulations need to be transparent and clearly stipulate the rights and obligations of
194.
entrepreneurs. It is also important that any regulations are transparent and clearly stipulate the
rights and obligations of entrepreneurs as they are often unsure about the specific regulations
and forced to hire intermediaries (including government officials) to deal with regulatory hurdles.
Simplification and automation of existing procedures would facilitate registration for the informal
companies considering becoming formal.
However, many firms still choose to remain informal and further incentives are needed to entice
195.
informal sector firms to become formal. Apart from a reduction in the costs of registration, it
will also be necessary to increase the benefits from operating formally. Formal sector firms in Cambodia
complain relatively more than informal firms about customs and trade regulations, labor regulations,
corruption, crime/theft/disorder, anti-competitive or informal practices, legal system/conflict
resolution, tax rates, tax administration, skills and education of available workers, and access to
finance. Improvements in these areas are needed to make it worthwhile for informal firms to
become formal.
Another issue is that firms might lack the trust in the Government to operate formally. Therefore,
196.
trust needs to be built between the informal sector and the government. This may be done through
a public-private sector dialogue and by explicitly involving representatives from the informal
sector to help create an environment conducive to formality. The “Government Private Sector
Forum (GPSF)”, a formal consultation mechanism between the government and the private sector
could be a venue for this dialogue, particularly within the sectoral working groups which meet
regularly to review specific issues related to the business environment. The Customs-Private
Sector Partnership Mechanism meets quarterly and it could be asked to consider specific issues
to encourage formalization. These mechanisms have been taken seriously by both sides over more
than a decade now, and have removed many obstacles and solved multiple trade-related
issues. However, there has been no involvement from the informal sector in these dialogues and
for future dialogues it may be important to involve the informal sector to build trust and develop
appropriate incentives to increase the net benefits from operating formally.
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COPING WITH A DEMANDING INVESTMENT CLIMATE
II- THE INFORMAL SECTOR
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The Investment Climate Climate Assessment 2014
10 4 Creating Oppor tunity for Firms in Cambodia
Annexes
Annex I : Profile of investment climate perceptions
Annex Table 1.1: Respondents’ evaluation to general constraints to operation (% of firms evaluating constraint as ‘major’ or ‘very severe’)
Cambodia
Formal
Informal
Small
Medium
Large
Agro-
processing
Manufacturing
(except agro-
processing)
Trade
Tourism
Other
A. Telecommunications 6.30 4.48 6.97 6.15 7.10 8.09 11.99 10.22 4.42 3.39 5.26
B. Electricity 42.90 33.07 46.39 44.06 33.20 38.05 45.33 45.48 43.01 41.89 21.52
C. Transportation 23.60 9.23 28.61 24.16 21.39 10.52 46.55 25.10 22.16 10.18 10.91
D. Access to land 11.40 12.87 10.92 11.68 7.69 16.94 19.94 14.10 9.27 7.90 9.63
E. Tax rates 16.90 23.34 14.43 16.51 18.58 27.42 4.39 4.86 20.89 22.55 47.24
F. Tax administration 10.00 17.46 6.99 9.30 13.78 22.28 4.25 3.97 13.04 9.65 37.66
G. Customs and trade regulations 5.50 13.42 1.89 4.81 8.23 16.48 2.45 7.94 7.32 2.05 13.95
H. Labor regulations 1.50 4.75 0.22 1.12 2.89 11.10 0.63 1.51 0.40 0.68 29.15
I. Skills and education of available workers 20.40 27.31 17.95 19.35 25.13 43.69 17.53 35.96 19.53 13.79 17.42
J. Business licensing and operating permits 4.50 6.61 3.66 3.99 8.07 10.46 1.17 2.68 5.26 5.82 9.79
K. Access to financing (e.g. collateral) 11.60 14.17 10.72 11.66 11.26 11.29 11.24 16.64 12.88 6.83 10.38
L. Cost of financing (e.g. interest rates) 22.90 24.70 22.18 23.29 20.35 16.58 29.00 17.91 25.11 20.18 8.93
M. Regulatory policy uncertainty 19.40 20.35 19.11 18.17 28.71 31.08 12.69 7.68 17.92 32.30 24.44
N. Corruption 30.60 47.76 24.48 29.24 38.99 49.90 20.71 17.04 31.47 41.26 57.82
O. Crime, theft and disorder 6.30 12.29 4.12 5.63 11.39 10.57 0.44 2.06 7.42 10.28 9.94
P. Anti-competitive or informal practices 23.10 36.79 18.20 22.40 28.99 27.84 14.80 15.25 27.97 23.42 47.59
Q. Legal system/conflict resolution 6.60 16.21 3.09 6.08 7.86 21.25 2.28 6.88 8.66 5.42 9.14
Creating Oppor tunity for Firms in Cambodia
The Investment Climate Climate Assessment 2014
Note: Numbers in bold indicate statistically significant differences between subgroups (at 10 percent). Includes both formal and informal enterprises.
10 5
10 6
Annex Table 1.1 (continued)
Domestic
Foreign-
invested
Non-
exporter
Exporter
High
productivity
Medium
productivity
Low
productivity
A. Telecommunications 6.21 7.83 6.26 7.14 8.74 6.26 5.16
B. Electricity 42.93 42.90 43.23 33.02 48.45 40.54 38.21
C. Transportation 24.31 8.10 23.37 30.70 36.66 15.20 21.21
D. Access to land 10.71 27.53 10.78 32.06 15.08 15.01 6.15
Creating Oppor tunity for Firms in Cambodia
E. Tax rates 16.05 35.50 16.88 18.57 7.99 27.08 12.89
The Investment Climate Climate Assessment 2014
F. Tax administration 8.80 34.61 9.80 17.28 8.26 10.42 10.59
G. Customs and trade regulations 3.98 30.93 4.91 19.98 5.08 3.26 7.44
H. Labor regulations 1.32 5.50 1.34 6.35 0.69 3.26 0.64
I. Skills and education of available workers 20.35 21.31 20.26 24.56 16.21 16.87 28.06
J. Business licensing and operating permits 4.46 5.77 4.47 6.31 6.42 2.01 4.34
K. Access to financing (e.g. collateral) 11.57 12.83 11.57 13.13 10.97 14.32 10.36
L. Cost of financing (e.g. interest rates) 22.58 29.50 22.35 39.80 20.90 17.86 30.34
M. Regulatory policy uncertainty 19.14 25.91 19.35 22.23 18.53 16.52 22.81
N. Corruption 28.53 76.46 29.67 60.30 27.15 27.00 34.87
O. Crime, theft and disorder 5.22 29.66 6.27 6.19 2.72 7.48 8.35
P. Anti-competitive or informal practices 22.49 37.25 23.23 19.83 17.55 24.64 26.18
Q. Legal system/conflict resolution 5.50 30.33 6.24 18.49 3.63 4.30 9.34
Note: Numbers in bold indicate statistically significant differences between subgroups (at 10 percent). Includes both formal and informal enterprises
Annex II: Investment climate and productivity
We now undertake an analysis of the relationship between the investment climate and firm-level productivity
in Cambodia. This analysis of the relationship between the investment climate and firm-level productivity
in Cambodia uses both the ICA 2007 and ICA 2012 data to estimate a production function for value added.32
Value-added is calculated as the reported sales of output minus the costs for raw material, electricity, fuel,
communications, and other costs of production (except investment, depreciation, interest payments and
taxes).33 Labor is measured as the sum of the number of permanent employees and the average number of
temporary employees in the year. The capital stock is measured as the sales value (in 2007) or replacement
cost (2012) of the machinery, equipment (including computers) and vehicles.
The results are illustrated in Table 2.1. The first column in Table 2.1 shows the estimates of a Cobb-Douglas
production function without the investment climate variables. Apart from the inputs for labor and capital,
also a number of firm characteristics have been included that are often found to affect productivity, namely
the age of the firm (in log years), firm size dummies for medium (between 20 and 100 employees) and large
firms (100 or more employees), a dummy for whether the firm exports (directly or indirectly), a dummy for
whether the firm is (partly) foreign-owned, and the shares of the labor force with primary, lower secondary
or higher secondary education. We also include location and sector dummies.
The regressions include all available observations except those with negative value-added (which are
dropped automatically because of the loglinear specification). We have verified that further cleaning of the
data did not affect the results in any serious manner and therefore we have retained all observations to keep
the sample size as large as possible.34
The estimation results in the first column of Table 2.1 are plausible. Both the inputs for labor and capital
have a positive and strongly significant impact on value-added, and they add up to one. Also firms that are
older tend to be more productive, and this is also the case for exporting firms and firms with (some) foreign
ownership. Firms with more educated workforces tend also produce more value-added. Interestingly, we
do not find that medium and/or large firms are more productive than small firms, although it should be
noted that the survey was designed to include firms with a minimum of five permanent employees only (and
hence the micro firms are not included).
The Cambodia enterprise surveys of 2007 and 2012 include a large number of indicators that can be used
to measure the investment climate in Cambodia. Following the taxonomy used by Escribano and Guasch
(2005), we include a number of indicators for three areas in particular, namely (1) infrastructure, (2) red
tape, corruption and crime, and (3) finance and corporate governance and we analyze how productivity is af-
32
V
alue-added rather than gross output is used as the dependent variable in the analysis, because the ICA 2012 questionnaire asked
trading firms not about their gross revenues from sales and the cost of goods purchased for resale, but about the resulting value of
profit from trading.
For trading firms the value-added is calculated as profits from trading minus the costs for electricity, fuel, communication, and other
33
costs of trading (except investment, depreciation, interest payments and taxes).
34
Some other studies have imposed a number of additional cleaning rules (apart from omitting observations with negative value
added), such as dropping observations if the share of intermediates in output is less than 0.1 or more than 1, if the intermedi-
ates share in output deviates more than three standard deviations from the industry-mean , or if the observation is located in the
bottom or top 5 percent of the labor productivity distribution for each industry and year (World Bank 2006, pp.141-42).
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 107
fected by in these three areas.35 For infrastructure we use two indicators, namely (1) the total hours of power
outages in the past year, and (2) the average number of days in the past year that it took a firm to clear
customs from the time the firm’s goods arrived in their point of entry (e.g. airport) until the time the firm could
claim them from customs.36
For red tape, corruption and crime four indicators are included in Table 2.1. These are (1) the number of
inspections or required meetings with tax officials in the past year, (2) the percentage of time in a typical
week spent by senior management dealing with bureaucracy/regulation, (3) the percentage of sales paid by a
typical comparable firm in gifts or informal payments to public officials to “get things done” with regards to
customs, taxes, licenses, regulations, services, etc., and (4) loss from theft, robbery, vandalism or arson (as
a percentage of sales) .
Four indicators are reported for the third area of the investment climate, finance and corporate governance:
(1) whether the firm has an overdraft facility or line of credit, (2) whether the firm has loan from bank or fi-
nancial institution, (3) whether the firm has constrained access to loans, and (4) whether the firm has hired an
outside accounting/audit firm or individual auditor in 2006. A firm is regarded as having constrained access to
loans if the firm does not have a line of credit or loan from a bank or financial institution because the applica-
tion was turned down or because the firm never applied because it considered the application procedures too
cumbersome, the collateral requirements too stringent, interest rates too high and/or because of corruption
in the allocation of bank credit.
In the second column of Table 2.1, we report the estimation results after including these investment climate
(IC) variables. The F-test on the IC variables has a p-value of less than 0.01 and therefore the IC variables are
jointly highly significant. Also the results are mostly plausible: firms that suffer from larger delays in clearing
customs are less productive. Also firm productivity suffers when firms need to pay a higher percentage of
their sales to “get things done” or when they are the victim of theft, robbery, vandalism or arson. Firms with
a loan are significantly more productive suggesting that some of the other firms are credit constrained. This
is also suggested by the negative coefficient for the dummy whether a firm is credit constrained although it
remains insignificant in this specification.
Because some firms have been interviewed in both datasets (panel firms), we re-estimate the model
allowing for random effects. This does not affect the results in any noticeable manner. We also tested
whether the random effects should be replaced by fixed effects (allowing for correlation of the firm-level
effects with the other regressors). The Hausman test does reject the use of random effects if we do not
apply additional cleaning. As noted above, we did not apply additional cleaning to the data to keep the
sample size as large as possible and because it did not seem to affect the pooled regression results in any
serious way. This is different when we estimate the model with fixed effects to calculate the Hausman
test. As soon as we apply some common cleaning rules applied in other studies (see the footnote 3 above)
or omit a small number of obvious outliers identified through added value plots, the estimates from a fixed
effects regression are no longer significantly different from those with a random effects regression. Because
it is well-known that fixed effects regressions are much more sensitive to measurement error than random
effects regression, we regard the Hausman test after some cleaning as more accurate than the one based
on uncleaned data (as reported in the table).
35
Table A.2 in Escribano and Guasch (2005). Some of their indicators are not available in the Cambodia ICA 2007 and 2012. Also
some of the indicators are strongly related (e.g. there are five indicators related to power outages) and we include only one of them
in the analysis. We do not include the variable ‘fraction of sales undeclared to the IRS’ because it refers to the typical firm and is
based on perception rather than observation.
36
For firms that did not (directly) import goods the last indicator has missing values. There are no missing values for the first indicator
because all firms had power. We include a dummy variable in the regressions indicating whether there is a missing value for days
to clear customs for imports, and missing values are assigned a zero.
The Investment Climate Climate Assessment 2014
10 8 Creating Oppor tunity for Firms in Cambodia
Annex Table 2.1: Productivity and the investment climate, pooled regressions (2007 and 2012)
Without IC With IC variables
variables
OLS OLS Random effects
(1) (2) (3)
Inputs
Labor (log) 0.79*** (0.04) 0.83*** (0.05) 0.86*** (0.06)
Capital (log) 0.20*** (0.04) 0.18*** (0.06) 0.18*** (0.05)
Firm characteristics
Age of firm (log years) 0.16*** (0.05) 0.12** (0.05) 0.11** (0.05)
Size (dummy, omitted: small)
Medium 0.08 (0.12) 0.08 (0.14) 0.01 (0.13)
Large 0.17 (0.21) 0.15 (0.25) -0.02 (0.25)
Exporter (dummy) 0.58** (0.26) 0.60*** (0.19) 0.56*** (0.19)
Foreign (dummy) 0.40** (0.17) 0.39** (0.18) 0.38** (0.17)
Human capital workers (share, omitted: other)
Primary education or less -0.04 (0.12) -0.14 (0.13) -0.14 (0.13)
Lower secondary education 0.31* (0.17) 0.25 (0.17) 0.22 (0.17)
Upper secondary schooling 0.75*** (0.19) 0.68*** (0.23) 0.61*** (0.22)
Investment climate variables
Infrastructure
Total duration of power outages 0.05 (0.03) 0.05 (0.03)
(log(hours+1))
Days to clear customs for imports -0.41** (0.20) -0.43** (0.21)
(log(days+1))
Red Tape, Corruption and Crime
Tax inspections/meetings per year 0.01 (0.05) 0.02 (0.05)
(log(times+1))
Senior management time dealing with 0.02 (0.02) 0.03 (0.02)
bureaucracy/regulation (log(percentage+1))
Payments to deal with bureaucracy ‘faster’ -0.10* (0.05) -0.13** (0.05)
(log(percentage of sales+1))
Loss from theft, robbery, vandalism or arson -0.24* (0.14) -0.25* (0.14)
(log(percentage of sales+1))
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 10 9
Without IC With IC variables
variables
OLS OLS Random effects
(1) (2) (3)
Finance and Corporate Governance
Firm has overdraft (dummy) 0.02 (0.20) 0.07 (0.22)
Firm has loan from bank/ fin. institution 0.27** (0.10) 0.25** (0.10)
(dummy)
Firm has constrained access to loan -0.11 (0.13) -0.14 (0.14)
(dummy)
External audit of financial statements 0.08 (0.17) 0.11 (0.16)
(dummy)
Year 2012 (dummy) 0.92*** (0.11) 0.80*** (0.10) 0.78*** (0.11)
Constant 5.17*** (0.48) 5.61*** (0.79) 5.67*** (0.82)
Observations 1090 929 929
R2 0.70 0.70 0.70
IC variables (F-test , p-value) - 0.00 0.00
Translog production function (F-test , 0.07 0.04 0.19
p-value)
Sector-specific input coefficients 0.55 0.12 0.06
(F-test , p-value)
Hausman test fixed versus random effects - - 0.35a
(X2-test, p-value)
Note: standard errors correct for clustering within location-sector groupings. * significant at 10%; ** significant
at 5%; *** significant at 1%. The regressions also include location and sector dummies and a dummy variable for
whether there is a missing value for days to clear customs for imports.a After omitting 13 outliers identified from
added value plots (see text). If the same cleaning rules are applied as in World Bank 2006 (pp.141-42), the p-value
increases to 0.96.
A test has been performed to determine whether the Cobb-Douglas specification is an accurate enough
specification of the applied production technology by the firms by considering the more flexible translog
specification. The F-test suggests that it is, since it does not reject the Cobb-Douglas specification at a
significance level of 10 percent, at least for the random effects specification.
There is some evidence that sector-specific instead of common input coefficients should be used (the
F-test has a p-value of 0.06 in the random effects specification). We therefore also re-estimated the random
effects model but allowing for the input coefficients to vary across agro-processing, manufacturing (except
agro-processing), trade, tourism and other. We found that allowing for sector-specific input coefficients did
barely affect the size and significance of the estimated coefficients of the investment variables (see column
1 in Table 2.2).
The Investment Climate Climate Assessment 2014
1 10 Creating Oppor tunity for Firms in Cambodia
Annex Table 2.2: Random effect estimates of impact of investment climate variables on productivity
Sector-specific input Instrumental
coefficients variables
(1) (2)
Investment climate variables
Infrastructure
Total duration of power outages (log(hours+1)) 0.05 (0.03) 0.03 (0.03)
Days to clear customs for imports (log(days+1)) -0.46** (0.20) -0.21 (0.23)
Red Tape, Corruption and Crime
Tax inspections/meetings per year (log(times+1)) 0.00 (0.05) 1.31*** (0.48)
Senior management time dealing with bureaucracy/ 0.02 (0.02) -0.09 (0.07)
regulation (log(percentage+1))
Payments to deal with bureaucracy ‘faster’ -0.11** (0.05) -0.21*** (0.08)
(log(percentage of sales+1))
Loss from theft, robbery, vandalism or arson -0.28** (0.13) -0.26* (0.14)
(log(percentage of sales+1))
Finance and Corporate Governance
Firm has overdraft (dummy) 0.05 (0.22) 0.19 (0.25)
Firm has loan from bank/ financial 0.23** (0.10) 0.25 (0.20)
institution (dummy)
Firm has constrained access to loan (dummy) -0.13 (0.13) 0.92 (1.27)
External audit of financial statements (dummy) 0.11 (0.16) 0.05 (0.15)
Year 2012 (dummy) 0.77** (0.11) 0.61*** (0.14)
Constant 4.66** (0.73) 5.49*** (0.59)
Inputs Yes Yes
Firm characteristics Yes Yes
Observations 929 929
R2 0.71 0.58
Note: standard errors correct for clustering within location-sector groupings. * significant at 10%; ** significant
at 5%; *** significant at 1%. The regressions also include location and sector dummies and a dummy variable for
whether there is a missing value for days to clear customs for imports. The instruments used are the interaction
dummies for sector and location.
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 111
A final concern might be that the results may be affected by the possible presence of endogeneity in the
investment climate indicators, for instance because more productive firms are more demanding of the
investment climate and therefore encounter and report more problems, or because of other omitted factors
correlated with both the investment climate and productivity. A number of previous studies have used
location-industry averages of the firm-level investment climate variables instead of the firm-level variables
themselves to reduce the endogeneity problem (Dollar et al., 2005; Escribano and Guasch, 2005).
If we follow this approach only a few investment climate variables can be included in the analysis because
of the small number of location-industry cells. We therefore applied individual tests for the presence of
endogeneity in each of the investment climate variables in each year with a Hausman endogeneity test
using as instruments sector-specific location dummies (Cameron and Trivedi 2005, p.276). We found that
none of the IC variables showed significant endogeneity bias (at the 10 percent significance level), except for
the variables measuring the number of inspections (p-value 0.001) and whether the firm is credit constrained
(p-value 0.09).
Therefore, we also estimate an instrumental variable random effects model with sector-specific location
dummies as instruments for the variables measuring the number of inspections and whether a firm is credit
constrained. The last column of Table 2.2 shows the results. We still find similar productivity impacts from
custom delays, payments to deal with bureaucracy, losses from theft, robbery, vandalism or arson, and bank
loans as before, although two of these impacts are no longer significant at conventional significance levels.
However, the impact of tax inspections is remarkably different when we control for endogeneity in this
variable. This difference can be understood when considering the tendency by firms to underreport their
sales (and therefore value added). In the ICA 2012 survey, firms report that on average typical firms in their
area of activity underreport their sales for tax purposes by 58.6 percent. If inspections increase reported
sales, then we expect to see a positive impact from inspections on measured value added. But if firms that
underreport less tend to attract fewer inspections, this would create a downward bias in the estimated
coefficient without instruments. Results in columns (1) and (2) indeed confirm this pattern.
While increasing the number of tax inspections/meetings with officials tends to increase the (reported)
productivity, it will also lead to increasing time spent by management dealing with bureaucracy and possibly
increased payments to deal with the bureaucracy ‘faster’, both of which will reduce the productivity. Hence,
the overall effect from increasing inspections is not a priori clear and depends on the amount of management
time and bribing involved.
Based on the estimates of the production function, we simulate the impact of changes in the investment
climate on productivity. In particular, we can consider how much productivity changes if we move from a
‘bad’ investment climate (bottom 10 percentile of the distribution) to a ‘good’ investment climate (top 90
percentile of the distribution). Table 2.3 shows how much of the productivity change between the 10th and
90th percentile of the distribution could be achieved by changes in the four investment climate variables
that were found to be mostly significant and robust across the different specifications: days to clear customs
for imports, payments to deal with bureaucracy ‘faster’, loss from theft, robbery, vandalism or arson, and
presence of a bank loan.37
37
We use the estimated coefficients of column (3) in Table 1 for the simulation.
The Investment Climate Climate Assessment 2014
112 Creating Oppor tunity for Firms in Cambodia
The simulations show that firms that would move from a bad investment climate to a good investment
climate would increase their value added by 37.5 percent with a reduction in the number of days it takes to
clear customs. If the improvement is in terms of a reduction of payments to deal with bureaucracy faster,
value added would increase by 20.5 percent. Improvements in access to loans would have a productivity
impact of 28.7 percent and a reduction in the loss from theft, robbery, vandalism or arson would increase
productivity by 3.5 percent.
Annex Table 2.3: The importance of the investment climate for productivity
Name of SEZ Information
10th 90th % Change
Percentile Median Percentile value added*
Days to clear customs for imports (log(days+1)) 0 0 1.10 -37.5
Payments to deal with bureaucracy ‘faster’ 0 0 1.79 -20.5
(log(percentage of sales+1))
Loss from theft, robbery, vandalism or arson 0 0 0.14 -3.5
(log(percentage of sales+1))
Firm has loan from bank/ financial institution 0 0 1 28.7
(dummy)
*The percentage change indicates how much value-added would change in response to a change in those variables from
the 10th to the 90th percentile.
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 113
Annex III: Registered SEZs in Cambodia38
Annex Table 3.1: List of registered Special Economic Zones in Cambodia
Name of SEZs Information
1. Neang Kok Koh 1) Location Neang Kok Village, Pakkhlong Commune, Mundul Seyma
Kong SEZ Destrict, Koh Kong Province
2) Land area 335.43 Ha
3) Project Implementation Infrastructure Developing: Fencing
4) Zone Investors 1- Camko Motor Company Ltd.:
(Vehicle assembly and spare part)
2-Yazaki Corporation (Wire harness)
2. Suoy Chheng 1) Location Neang Kok Village, Pakkhlong Commune, Mundul Seyma
SEZ Destrict, Koh Kong Province
2) Land Area 100Ha
3) Project Implementation Infrastructure Developing
4) Zone Investors None
3. S.N.C SEZ 1) Location Sangkat Bet Trang, Khan Prey Nob , Preah Sihanouk
Province
2) Land area 150 Ha
3) Project Implementation Infrastructure Developing
4) Zone Investors None
4. Stung Hav SEZ 1) Location Sangkat O Tres, Stung Hav District, Preah Sihanouk
Province
2) Land area 196 Ha.
3) Project Implementation Infrastructure Developing
4) Zone Investors None
5. N.L.C SEZ 1) Location Phum Prey Phdao abd Phum Thlok, Khum Chrok Mtes,
Srok Svay Teab, Sray Rieng Province
2) Land area 105 Ha.
3) Project Implementation Infrastructure Developing
4) Zone Investors None
38
Source: http://www.cambodiainvestment.gov.kh/list-of-sez.html; accessed 24 June 2013
The Investment Climate Climate Assessment 2014
1 14 Creating Oppor tunity for Firms in Cambodia
6. Manhattan 1) Location Bavet Commune, Chantrea District, Svay Rieng Province
(Svay Reing) SEZ
2) Land area 157 Ha.
3) Project Implementation The company already built infrastructure, connecting
power grid from Viet Nam and Fencing of the
first phase of 70 Ha.
4) Zone Investors 1- Best Way Industry Co., Ltd. (Bicycle)
2- S.Y.G. Steel International Co., Ltd. (Bolt-Nut)
3- Kingmaker Footwear Co., Ltd (Footwear)
4- Galaxy Textile Co., Ltd (Garment)
5- ARC Cambodia Corp.(Hi-tech equipment
recycling)
6- MSEZ Comfort Hospital Co., Ltd (Hospital)
7- Sheico (Cambodia) Co., Ltd (Neoprene wet suits)
8- Forest Packing (Cambodia) Co., Ltd (Packing bag)
9- Pique Garment Co., Ltd (Garment)
10-Leegrow Plastic Packaging Co., Ltd (Packaging bag)
Ampac Packaging (Cambodia) Ltd (Packaging
11-
products)
Eastern Industrial Enterprise Inc. (Garment
12-
and textile)
13- Visca Plastics Joint Stock Company (Plastic)
14- Angkor Spring Co., Ltd (Mattress products)
15- Kaoway Sports Ltd (Sport Shoes)
Morofuji (Cambodia) Co., Ltd (Bags and
16-
package products)
17-Top Sports Textile Ltd (Textile and garment)
18- Elite (Cambodia) Co., Ltd (Garment)
7. Poi Pet O’Neang 1) Location Poipet Commune and Nimit Commune, O’ Chhrov District,
SEZ Banteay Meanchey Province
2) Land area 467Ha.
3) Project Implementation Infrastructure Developing: Fencing, Entrance gate, Electric
pole
4) Zone Investors 1- Campack Co., Ltd. (Jewelry Packing Manufacturing)
8. Doung Chhiv 1) Location Kiri Vong District, Takeo Province
Phnom Den SEZ
2) Land area 79 Ha.
3) Project Implementation Infrastructure Developing: Landfill and fencing.
4) Zone Investors None
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 115
9. Phnom Penh 1) Location Khan Dangkor, Phnom Penh and Ang Snuol District,
SEZ Kandal Province
2) Land area 350 Ha.
3) Project Implementation Fencing, roads, administrative building, entrance,
electricity, water, and telecommunication system
have been installed.
4) Zone Investors 1- Navy Water Production Co., Ltd (Drinking water)
2- Bok Seng PPSEZ Dry Port Co., Ltd ( Dry port)
3- Redial Industrial Co., Ltd (Plastic)
4- Civil (CP) Construction Product Ltd ( Pole)
5- Tiger Wing Co., Ltd ( Footwear)
6- Evergreen Industrial Co., Ltd (Garment)
7-Yamaha Motor (Cambodia) Company Limited Co., Ltd
(Motorcycle assembly, accessories and spare parts )
ambodia Success Industries Co., Ltd (Steel processing
8-C
for construction material)
9- Agricom (Cambodia) Co., Ltd (Sugar packaging)
10- Cambox Private Limited (Plastic)
i-Xiang Co., Ltd ( Processing cartons and papers
11- J
production)
12- Colben Energy (Cambodia) PPSEZ Ltd (Power Plant)
13- Yi Xiang Co., Ltd (Plastic)
jinomoto (Cambodia) Co., Ltd (Seasoning and food
14- A
processing)
Sin Chn Hong (Cambodia) Plastics Industry Co., Ltd
15-
(Plastic)
16- Clean Circle Co., Ltd (Leather shoes)
ambodian Food Processing and Distribution Co., Ltd
17- C
(Food processing)
ichuan New Hope Agribusiness (Cambodia) Co., Ltd
18- S
(Animal feed)
19- MKK Co., Ltd (Cigarette and cigar)
iwayway (Cambodia) Food Industries Co., Ltd (Food
20- L
Processing)
aru Phnom Penh Comic Center Co., Ltd (Comic book
21- H
assembly and authoring)
ishells (Cambodia) Ltd (Heat insulation and its
22- D
products)
roceeding (Phnom Penh) Co., Ltd (Japanese traditional
23- P
clothes)
24- FST PP Co., Ltd (Japanese traditional clothes)
hin Feng Paper Co., Ltd (Carton box and paper
25- S
processing)
26- Atlas Ice (Cambodia) Co., Ltd (Ice manufacturing)
hibidi (Cambodia) Co., Ltd. (Electrical equipment)
27- T
inebea (Cambodia) Co., Ltd. (Small-size motor)
28- M
and M (Cambodia) Co., Ltd. (Leather products)
29- O
ombi (Cambodia) Co., Ltd. (Baby goods and toy)
30- C
The Investment Climate Climate Assessment 2014
1 16 Creating Oppor tunity for Firms in Cambodia
arunix (Cambodia) Co., Ltd.
31- M
(Wire harness assembly)
Sumi (Cambodia) Wiring Systems Co., Ltd.
32-
(Wiring Harness)
Kyowaseikan (Cambodia) Co., Ltd.
33-
(Packaging materials)
Sunhsin Thread And String (Cambodia) Co., Ltd
34-
(Shoulder Pads)
35- Zion Label And Printing Co., Ltd (Labels)
36- Daiwa Onkyo (Speaker)
37- Denso Electronics (Wiring harness)
10- Kampot SEZ 1) Location Koh Toch commune, Kampot district, Kampot Province
2) Land area 145 Ha.
3) Project Implementation Infrastructure Developing: Landfill and building Kampot
seaport.
4) Zone Investors None
11- Sihanouk- 1) Location Stung Hav District, Preah Sihanouk Province
ville SEZ 1
2) Land area 178 Ha
3) Project Implementation Infrastructure Developing
4) Zone Investors 1-Cambodian Energy Limited
(To build, operate and own a 100 MW coal fired power
generation plant)
2-C.I.I.D.G Erdos Hongjun Electric Power Co., Ltd
(Power plant of 3×135 MW (405MW) by coal-fire)
12- Tai Seng 1) Location Bavet District, Svay Rieng Province
Bavet SEZ
2) Land area 99 Ha
3) Project Implementation Infrastructure Developing: Fencing, landfill, connecting
electricity into the zone.
4) Zone Investors 1-Atlantic Cycle Co., Ltd (Bicycle)
2-La More (Cambodia) Ltd (Footwear)
3-DK Inc (Garment)
4-Yorks (Cambodia) Co., Ltd (Gloves)
5-Smart Tech (Cambodia) Co., Ltd (Bicycle)
6-A and J (Cambodia) Co., Ltd (Bicycle Manufacturing)
7-Swany (Cambodia) Corporation (Gloves)
8-Ronchester (Lady’s apparel)
9-Helsa South East Asia Co., Ltd (Shoulder Pads)
10-Towa (Cambodia) Co., Ltd (Men’s Suits)
11-Nakayama Shoji Co., Ltd (Baby underwear)
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 1 17
13- Oknha Mong 1) Location Srea Ambel District, Koh Kong Province
SEZ
2) Land area 100 Ha
3) Project Implementation Infrastructure Developing
4) Zone Investor None
14-Goldfame 1) Location Sa Ang District, Kandal Province
Pak Shun SEZ
2) Land area 80 Ha
3) Project Implementation Infrastructure Development: Fencing
4) Zone Investorst old Dragon Printing & Carton Boxes Factory Co., Ltd
1- G
(Carton, Printing plastic label, Knitting)
2- Kingway Manufacturing Limited (Garment)
3- Good Ray Development Limited (Garment)
15-Thary 1) Location Da commune, Memot District, Kampong Cham Province
Kampong
Cham SEZ 2) Land area 142.14 Ha
3) Project Implementation Infrastructure Developing
4) Zone Investor None
16- Sihanouk- 1) Location Pou Thoung Village, Betrang Commune and Smach deang
ville SEZ 2 Village, Ream Commune, Prey Nop District, Preah Sihan-
ouk Province
2) Land area 1,688 Ha
3) Project Implementation Infrastructure Developing: building fence, roads, the admin-
istrative building, entrance, electricity, water, and telecom-
munication system.
4) Zone Investors 1- Nanguo Garment Co., Ltd (Garment)
2- Hongdou International Garment Co., Ltd (Garment)
3- Qianlima Vehicle Co., Ltd (Vehicle assembling)
4- Taihua Plastic Products Co., Ltd (Plastics)
Huang Jia Arts and Crafts Co., Ltd (Arts and crafts candle)
5-
ealth (Cambodia) Steel Industry Engineering Co., Ltd
6- W
(Steel processing for construction material)
orseware Products Cambodia Co., Ltd (Horse ware
7- H
products)
8- Zhong Zheng (Cambodia) Co., Ltd (Bags)
Keeptop Sporting Goods (Cambodia) Co., Ltd.
9-
(Bags Factory)
10- BRILLIANT SHOES FACTORY Co., Ltd (Shoes)
11- P rosource Electronics (Cambodia) Co., Ltd (Household
appliances)
12- Wan Hai Hanger (Cambodia) Co., Ltd (Founded hanger)
13- Worldtec Cycles (Cambodia) Co., Ltd (Bicycles asembling)
14- Aley Global (Cambodia) co., Ltd (Garment)
15- Oufeiya Leather (Cambodia) Co., Ltd (Leather Products)
16- Asle Electronic (Cambodia) Co., Ltd (Electronics parts)
17- S handong Forest Wood (Cambodia) Co., Ltd (Floor and
plywood)
18-Izumi (Cambodia) Co., Ltd (TV frame and electric parts)
The Investment Climate Climate Assessment 2014
118 Creating Oppor tunity for Firms in Cambodia
17- D&M Bavet 1) Location Bavet commune, Chantrea District, Svay Rieng Province
SEZ
2) Land area 117.95Ha
3) Project Implementation Infrastructure Developing
4) Zone Investors None
18- Kiri Sakor 1) Location Khum Prek Kasach, Srock Kirisakor, Koh Kong Province
Koh Kong SEZ
2) Land area 1,750 Ha
Project Implementation
3) Infrastructure Developing
4) Zone Investors None
19- Sihanouk- 1) Location Tomnop Rolok Area, Sangkat Lek1 and Lek3, Sihanoukville
ville Port SEZ City, Preah Sihanouk Province
2) Land area 70 Ha
3) Project Implementation Infrastructure Developing
4) Zone Investors None
20- Kampong 1) Location Village 4, Ortres Commune, Stung Hav District, Preah
Saom SEZ Sihanouk Province
2) Land area 255 Ha
3) Project Implementation Infrastructure Developing
4) Zone Investors None
21- P (SEZ) I C 1) Location Salatean and Preytob Villages, Chhrokmates Commune,
Svayteab District, Svay Rieng Province.
2) Land area 107.55 Ha
3) Project Implementation Infrastructure Developing
4) Zone Investors None
22- MDS 1) Location Khum Thmorda, Srock Veal Veng, Pursat Province
THMORDA SEZ
2) Land area 2,265 Ha
3) Project Implementation Infrastructure Developing
4) Zone Investors None
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 1 19
Annex IV: Background on survey sample
We use the latest Enterprise Survey for Cambodia, conducted in 2012, as the main data source for our
analysis. The survey includes a special module on SEZs and it is the first in the country to sample firms
located inside the zones. In the original sample of the ES, 32 firms established inside SEZs replied to the
survey questionnaire in addition to 830 firms located outside the zones, for a total of 862 responding firms
(Annex Table 4.1).
Annex Table 4.1: Original sample for Cambodia’s Enterprise Survey (2012)
Location Firms Percent
Battambang 73 8.5
Siem Reap 105 12.2
Phnom Penh 439 50.9
Kampong Cham 106 12.3
Sihanouk Ville 52 6.0
Kampong Thom 10 1.2
Kandal 9 1.0
Prey Veng 10 1.2
Pursat 10 1.2
Ratanak Kiri 7 0.8
Kampong Chhnang 9 1.0
Manhattan(SEZ) 7 0.8
Sihanouk Ville(SEZ) 8 0.9
Tai Seng (SEZ) 4 0.5
Phnom Penh (SEZ) 11 1.3
Kandal (SEZ) 1 0.1
Koh Kong (SEZ) 1 0.1
Total 862 100
The Investment Climate Climate Assessment 2014
120 Creating Oppor tunity for Firms in Cambodia
Because the sectorial composition of firms inside SEZ does not reflect the composition of firms from the
overall economy as the Enterprise Survey (ES) intends to do, a direct comparison with all non-SEZ firms
is not optimal. For instance, the ES includes some types of firms that provide services or that are informal,
which are not present inside the zones. Thus, a survey sub-sample was chosen to serve as a comparison
group. For more details about the sample selection and firm characteristics see Annex Table 4.2 and Annex
Table 4.3.
Annex Table 4.2: Cambodia’s Enterprise Survey – Restricted Sample (number of firms)
Location Small Medium Large Total
Battambang 9 11 0 20
Siem Reap 2 10 0 12
Phnom Penh 22 31 86 139
Kampong Cham 11 16 3 30
Sihanouk Ville 1 3 0 4
Kampong Thom 1 1 0 2
Kampong Chhnang 1 0 0 1
Manhattan(SEZ) 0 1 6 7
Sihanouk Ville(SEZ) 0 4 4 8
Tai Seng (SEZ) 0 0 4 4
Phnom Penh (SEZ) 1 3 6 11
Kandal (SEZ) 0 0 1 1
Koh Kong (SEZ) 0 1 0 1
Total 48 81 110 240
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 121
Annex Table 4.3: Restricted Sample – Breakdown by Sectors (%firms)
Non-SEZ SEZ
Textiles 3.1 -
Apparel 47.8 35.5
Leather 3.1 16.1
Paper 1.9 -
Printing media 3.1 -
Pharmaceutical 0.6 -
Plastic 1.2 -
Other non-metallic minerals 0.6 -
Basic metal 3.1 -
Motor vehicles - 3.2
Electronic equipment 0.6 3.2
Furniture 1.9 -
Other manufacturing 31.1 35.5
Vehicles wholesale & retail 0.6 -
Wholesale trade 0.6 -
Wood & products - 3.2
Land transport - 9.2
Food and beverages services 0.6 -
Total 100 100
The Investment Climate Climate Assessment 2014
122 Creating Oppor tunity for Firms in Cambodia
Annex V: Levels of Cambodia business formalization
Level Description Key Documents Required Representation in PBES
Samples
2009 Full 2009
Original 10
Provinces
1 Fully Formal- Registration at Ministry of Commerce; Three-year 4.3% 5.5%
National Operating License from relevant ministry†; Patent
Tax registration at National Tax Authority; Value
Added Tax(VAT) identification number from Ministry
of Economics and Finance; paying profit tax under
real tax regime; Labor permit certifying approval of
company’s internal rules for enterprise with over 8
employees; Environmental Certificate governing
solid waste and water disposal from the Ministry of
Environment; Other licenses when applicable‡
2 Fully Formal- License to Operate Commercial Enterprises from 22.1% 21.5%
Provincial Provincial/Municipal Department of commerce*;
one-year Operating License from Ministerial
Department at provincial level†; Patent Tax
registration at Provincial/ Municipal Tax Authority;
Paying estimated tax if under $1500 annual profits;
Other licenses including Labor Permit and
Environmental Certificate when applicable‡
3 Unregistered One-Year Operation License from Ministerial 13.3% 14.3%
with Operating Department at Provincial Level†; patent tax
Licenses registration at Provincial/Municipal Tax Authority;
Other licenses including Labor Permit and
Environmental Certificate when applicable‡
4 Patent Tax Ψ Patent Tax registration at Provincial/ Municipal 23.7% 19.6%
Tax Authority
5 Fully No formal documentation 35.7 40.3%
information
† The 4 most common are the Factory Operating License for Industrial Enterprises from the Heavy Industries Section of
MIME: Handicraft Operating License from Handicraft and Light Industries Section of MIME: the Service Sector Operating
License from MOT: and the Agriculture. Forestry and Fisheries Operating License from the Ministry of Agriculture. For-
estry, and Fisheries.
‡ These include Construction Permits from the Ministry of Land Management, Urban Planning, and Construction, Road
Construction License from the Ministry of Public Works, Sanitation Permits, and Import/Export Licenses from the
Customs Authority.
ΨThe Patent Tax is an annual registration ( of license) fee levied on all businesses, industries and professions, though
farmer are exempted. The tax is based on turnover from the previous year. New businesses must register with the tax
authorities within 15 days after economic activity (Law of Taxation.1999). The first Patent tax is estimated in accord-
ance with the performance of similar enterprises. Firms that don’t wish to export may register with provincial- municipal
commerce division (under Prakas 78-MOC-2002).
*Firm that don’t wish to export and are not eligible to pay profit taxes under the “ real regime.” as they have below $1500
in annual profits (Article 12 of Law on Commercial Enterprises and Registration) and not eligible may register with the
Provincal/Municipal Commerce Division according to Prakas 78-MOC_2002, but they are not considered a legal entities.
Firms that don’t wish to export may register with Provincial-Municipal commerce Division (under Prakas 78-MCO_2002).
Source: IFC and The Asia Foundation (2009, Table 4).
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 1 23
Annex VI: Multivariate regressions predicting whether a firm
has a firm, tax, VAT or labor registration
VARIABLES (1) (2) (3) (4)
Firm Tax VAT Labor
registration registration registration registration
Sector (omitted: Manufacturing)
Agro-processing 0.13** -0.06 0.06 0.20**
(0.06) (0.10) (0.06) (0.09)
Trade 0.01 0.02 0.07 -0.12**
(0.06) (0.06) (0.06) (0.05)
Tourism 0.21** 0.05 0.10 0.01
(0.08) (0.07) (0.07) (0.05)
Other sector -0.06 -0.07 -0.01 -0.10
(0.08) (0.07) (0.07) (0.07)
Location (omitted: Phnom Penh)
Battambang -0.07 0.05 -0.02 -0.02
(0.07) (0.04) (0.10) (0.12)
Kampong Cham -0.36*** -0.25*** -0.21*** -0.36***
(0.05) (0.08) (0.06) (0.05)
Sihanouk Ville 0.12 0.05 0.19** -0.03
(0.11) (0.06) (0.09) (0.14)
Siem Reap 0.04 -0.03 0.03 -0.11***
(0.09) (0.06) (0.08) (0.03)
Firm size (omitted: small)
Medium firm 0.13*** 0.16*** 0.24*** 0.26***
(0.03) (0.04) (0.05) (0.05)
Large firm 0.30*** 0.18*** 0.41*** 0.34***
(0.04) (0.04) (0.07) (0.07)
The Investment Climate Climate Assessment 2014
1 24 Creating Oppor tunity for Firms in Cambodia
VARIABLES (1) (2) (3) (4)
Firm Tax VAT Labor
registration registration registration registration
Other control variables
Share of female workers (%) 0.03 0.07 -0.05 0.06
(0.08) (0.09) (0.10) (0.10)
Firm age (year) -0.00 -0.00 0.00 -0.00
(0.00) (0.00) (0.00) (0.00)
Any exports (dummy) 0.08 0.04 0.08 0.08
(0.07) (0.04) (0.06) (0.07)
Any foreign ownership (dummy) 0.18*** 0.04 0.21*** 0.21***
(0.05) (0.03) (0.04) (0.07)
Capital- labor ratio (106 US$) 31.52*** 26.78*** 23.41*** 31.08**
(9.15) (7.69) (7.56) (11.53)
Value added per worker (106 US$) 4.55*** 1.66 1.71 3.48*
(1.45) (2.33) (1.59) (1.74)
Constant 0.43*** 0.69*** 0.33*** 0.32***
(0.06) (0.08) (0.07) (0.08)
Observations 524 524 524 524
R-squared 0.30 0.21 0.26 0.32
Robust standard errors in parentheses (clustered by location-sector pairs), *** p<0.01, ** p<0.05, * p<0.1
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 1 25
126
Annex VII: Reported major and severe constraints to business operation by registration status (%)
Table: Respondents’ evaluation to general constraints to operation by registration status % of firms evaluating constraint as “major” or “very severe”
Firm registration Tax registration VAT registration Labor registration
Cambodia
No
Yes
No
Yes
No
Yes
No
Yes
A. Telecommunications 6.3 7.6 4.0 8.1 5.0 7.0 5.0 5.8 7.7
Creating Oppor tunity for Firms in Cambodia
B. Electricity 42.9 46.5 36.0 55.7 33.8 46.8 35.3 44.4 38.1
The Investment Climate Climate Assessment 2014
C. Transportation 23.6 31.0 8.4 38.4 12.4 31.9 6.7 26.0 15.2
D. Access to Land 11.4 12.1 10.1 12.8 10.5 12.5 9.2 10.2 15.6
E. Tax rates 17.0 14.8 20.6 0.7 26.6 16.4 17.9 14.5 24.2
F. Tax administration 10.0 7.4 14.4 0.3 15.5 7.9 13.6 7.0 18.8
G. Customs and Trade Regulations 5.5 2.0 10.8 2.1 7.8 2.2 10.9 3.7 10.2
H. Labor Regulations 1.5 0.2 3.7 0.2 2.3 1.4 1.8 0.3 5.0
I. Skills and Education of Available Workers 20.4 18.7 23.7 13.4 25.4 18.5 24.1 17.6 29.5
J. Business Licensing and Operating Permits 4.5 3.6 6.0 4.6 4.5 4.2 5.1 3.7 6.9
K. Access to Financing (e.g. collateral) 11.6 9.8 15.1 5.5 16.1 10.3 14.2 9.9 17.2
L. Cost of Financing (e.g. interest rates) 22.9 23.4 21.8 25.0 21.3 24.4 19.9 23.6 20.4
M. Regulatory Policy Uncertainty 19.5 17.9 22.2 20.3 18.9 17.6 22.9 18.3 23.1
N. Macroeconomic Instability (inflation, exchange rate) 41.6 40.9 42.8 38.5 43.8 40.8 43.0 39.2 49.3
O. Corruption 30.6 25.2 41.0 19.9 38.3 26.8 38.1 26.2 44.9
P. Crime, theft and disorder 6.3 4.1 10.4 0.6 10.3 4.3 10.1 2.7 18.0
Q. Anti-competitive or informal practices 23.1 17.3 34.3 14.1 29.6 18.8 31.7 20.3 32.4
R. Legal system/conflict resolution 6.6 3.2 13.0 0.4 11.0 3.8 12.0 4.7 12.6
Note: numbers in bold indicate statistically significant differences between subgroups (at 10 percent).
Annex VIII: Cobb-Douglas Production Function Estimates
(dependent variable: log of value added)
VARIABLES (1) (2) (3)
All firms Formal Informal
Capital (log) 0.25*** 0.31*** 0.20***
(0.04) (0.06) (0.04)
Labor (log) 0.76*** 0.74*** 0.79***
(0.06) (0.12) (0.07)
Battambang 0.28 0.26 0.23
(0.18) (0.28) (0.23)
Siem Reap -0.05 -0.71** 0.21
(0.16) (0.29) (0.18)
Kampong Cham 0.09 -0.29 0.61**
(0.19) (0.22) (0.31)
Sihanouk Ville 0.07 0.23 0.09
(0.23) (0.37) (0.29)
Agro-processing 0.15 -0.68** 0.55**
(0.21) (0.34) (0.25)
Trade 0.93*** 0.96*** 0.72***
(0.20) (0.27) (0.26)
Tourism 0.23 0.24 0.09
(0.18) (0.23) (0.24)
Other 0.35* 0.39 0.17
(0.20) (0.28) (0.28)
Exports (dummy) 0.63** 1.65 0.43*
(0.27) (1.17) (0.22)
Foreign ownership (dummy) 0.19 -0.25 0.33**
(0.16) (0.56) (0.16)
Lower secondary school (proportion) 0.13 0.08 0.25
(0.21) (0.38) (0.26)
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia 1 27
VARIABLES (1) (2) (3)
All firms Formal Informal
Upper secondary school (proportion) 0.09 0.49 -0.21
(0.25) (0.40) (0.35)
Higher education (proportion) 0.55** -0.22 0.86***
(0.25) (0.45) (0.31)
Firm registration 0.33***
(0.13)
Constant 5.68*** 5.36*** 6.41***
(0.32) (0.56) (0.42)
Observations 711 218 493
R2 0.66 0.54 0.65
Robust standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1
The Investment Climate Climate Assessment 2014
Creating Oppor tunity for Firms in Cambodia
The Investment Climate Climate Assessment 2014
130 Creating Oppor tunity for Firms in Cambodia